S&P in Sideways Trend that Reflects an Indecisive Market

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Tuesday March 5, 2019.

We’ve noted in the previous Market Outlook that: “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.”  As anticipated, the S&P advanced as much as 0.5 percent following a report that the U.S. and China are nearing a trade deal. The benchmark index was then down as much as 1.3 percent as traders questioned whether a trade deal would revive global growth as many headwinds loom, including Brexit, a potential U.S.-Europe trade war and an economic slowdown in China.  For the day, the bench mark gauge dropped 0.4 percent to 2,792.62.  The Dow Jones Industrial Average fell 0.8 percent to 25,819.65. The Nasdaq Composite closed 0.2 percent lower at 7,577.57.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, jumped nearly 8 percent to 14.63.

Financial stocks fell as government bond yields, which trade inversely to prices, declined amid a flight to safety.  Falling Treasury yields are seen as a headwind for banks, reducing their net interest margin, the difference between the interest income generated by operations and the amount of interest paid out to their lenders.  As such, the Financial Select Sector SPDR ETF (XLF) fell 0.64 percent on the day but is up more than 11 percent YTD, slightly outperformed the S&P.  Now the question is whether recent pullback is a pause that refreshes or it’s a beginning of something worse?  Below is an update look at a trade in XLF.

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 – Financial Select Sector SPDR ETF (weekly)

Our “U.S. Market Trading Map” painted XLF bars in red (sell) – see area ‘A’ in the chart. The first dominant feature on the chart is the rising line starting in late 2015.  The second dominant feature of the chart is the downward trend since early 2018, which represented the digestion period.  Over the past few weeks, XLF has been basing sideways after the late 2018 rally ran out of steam near the 1-year moving average.  This level was significant when XLF fell below it in late 2018.  A close above that level will break the bearish lower lows and lower highs pattern and trigger acceleration toward the 2018 high, just above 30.

XLF has support near 26.40.  A close below that level will trigger a short-term sell signal and a retest of 24.50, or the 38.2% Fibonacci retracement, should be expected.  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 remains 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”]

S&P moved down to test support at the late February breakout point after the early rally attempt ran out of steam near the October-December 2018 highs.  The late day rally suggested that the support would hold.  In fact, not much has been changed over the past few weeks.  S&P bounced back and forth within the narrow 2760-2817 trading range, which represented the digestion period in the aftermath of the late December upswing.  Money Flow measure is above the zero line, indicating a positive net demand for stocks.  This is a bullish development, suggesting that the index might breakout to new highs as soon as it works off excessive optimism.

Short-term trading range: 2750 to 2870.  S&P has support near 2760 while key support is at 2750.  A close below that level will trigger a short-term sell signal with downside target near 2680. 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 remains in a consolidation phase that reflects an indecisive market.  While near-term risk is greater to the downside, the long-term technical backdrop remains positive so sell-off should be shallow and quick because the sideline money will try to fight its way back into the market.

 

Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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