S&P Broke out from Short-term Downward Trend

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Monday March 4, 2019.

We’ve noted in the previous Market Outlook that: “recent trading actions leaving the S&P in what looks to us like an orderly high level consolidation of the February rally.  The index is holding firmly above 2750, a level it has not breached since market broke down in late 2018.  This is a positive development, increased the probability that the S&P will break out to new highs as soon as the market shakes off excessive bullishness.”  As anticipated, the S&P rose 0.7 percent Friday to close at 2,803.69 amid optimism about a U.S.-China trade deal.  The Dow Jones Industrial Average added 0.4 percent to 26,026.32. The Nasdaq Composite advanced 0.8 percent to 7,595.35.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell more than 8 percent to 13.57.

Biotech attracted strong buying last week following report that Roche will pay $114.50 per share for Spark, a 122% premium to the February 22 closing price.  As such, the SPDR S&P Biotech ETF (XBI) surged 3 percent on the day and is up 28 percent YTD, outperformed the S&P by a wide margin.  Now the question is whether the rally has more legs?  Below is an update look at a trade in XBI.

The graphics below are from our “U.S. Market Trading Map”, show the near-term technical bias and trading ranges.  As shown, the underlying is in a short-term bullish trend when the price bars are painted in green.  The underlying is in a short-term bearish trend when the price bars are painted in red.  The yellow bars identify period of neutral or sideways trading pattern.  Additionally, the light-blue shading represents the short-term trading range.  A move above or below that range is considered overbought (as represents by the red shading) or oversold (as represents by the dark-green shading).  Readings above or below the red and green shaded areas are considered extremely overbought or extremely oversold.

Chart 1.1 – SPDR S&P Biotech ETF (weekly)

Our “U.S. Market Trading Map” painted XBI bars in green (buy) – see area ‘A’ in the chart. The first dominant feature on the chart is the rising line starting in early 2016.  The second dominant feature of the chart is the downward trend since early 2018, which represented the digestion period.  XBI has been on a tear in recent days after the December selloff found support near the 61.8% Fibonacci retracement.  Last week’s rally pushed the ETF above the 1-year moving average, a key technical level based on moving average.  This is positive development and opened up for a retest of the 2018 high, just above 101.

XBI has support just below 89.  Short-term traders could use that level as the logical level to measure risk against.

Chart 1.2   – S&P 500 index (daily)

Short-term technical outlook shifted to bullish (buy).  Last changed March 1, 2019 from bearish (sell) (see area ‘A’ in the chart).

[Note: for more details analysis, please take a look at our “US Market ETF Trading Map”]

As expected, S&P rebounded nicely after recent pullback was met with a new wave of buying interest.  Friday’s rally pushed the S&P above the 4-day falling trend line resistance and the important sentiment 2800 mark, clearing an important hurdle.  This is a bullish development, supporting further upside follow-through and a test of the more important resistance in the 2870 zone, or the October breakdown point and the lower boundary of the red band.  Over the next few days, it will be important to monitor the breakout and retreat behaviors near 2817 to determine whether breakouts are decisive.

Short-term trading range: 2750 to 2870.  S&P has minor support near 2780 while key support is at 2750.  The index has resistance near 2817.  A close above that level will bring the 2018 high, near 2940, into view.

Long-term trading range: 2640 to 2960.  S&P has support near 2750.  A close below that level has measured move to 2640.  The index has resistance near 2850.  A close above that level has measured move to 2960.

In summary, S&P cleared key technical resistance, breaking out from the one-week downward trend.  Nevertheless, it will be important to monitor the breakout and retreat behaviors over the next few days to determine whether breakouts are decisive.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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