S&P Held Support but Follow-through is the Key

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Tuesday March 12, 2019.

Stocks closed sharply higher Monday amid dovish comments from Fed Chair Jerome Powell and strength in tech stocks.  For the day, the Dow Jones Industrial Average added 0.8 percent to close at 25,650.88. The S&P gained 1.47 percent to end the day at 2,783.30. The Nasdaq Composite advanced 2.02 percent to 7,558.06.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, tumbled more than 10 percent to 14.33.

Tech stocks outperformed as the FAANG trade was back in play with shares of Apple (AAPL) increasing 3.5 percent after the stock was upgraded to ‘Buy’ from ‘Neutral’ at Bank of America/Merrill Lynch. Facebook (FB) also received an upgrade to ‘Buy’ from ‘Neutral’ at Nomura.  As such, the Technology Select Sector SPDR ETF (XLK) jumped 2.15 percent on the day and is up more than 15 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 XLK.

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 – Technology Select Sector SPDR ETF (weekly)

Our “U.S. Market Trading Map” painted XLK bars in green (buy) – see area ‘A’ in the chart. The first dominant feature on the chart is the rising line starting in 2015. The second dominant feature of the chart is the downward trend in late 2018, which represented the digestion period.  The December selloff found support near the 38.2% Fibonacci retracement.  The January oversold rally pushed the ETF above the 1-year moving average, a key technical level based on moving averages.  Over the past few weeks, XLK has been basing sideways using the 1-year moving average as support as it works off overbought conditions.  The overall technical backdrop remains bullish, suggested that the ETF will climb up to test the 2018 high as soon as it works off excessive optimism.  A close above 72 has measured move to 76, or the 2018 high.

XLK has support near 69.  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 11, 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 rebounded nicely off support at the early February bullish breakaway gap.  Monday’s rally pushed the index up against the lower boundary of the pink band.  This level was significant when the S&P fell below it last week. Money Flow measure shifted higher from above the zero line, indicating a positive net demand for socks.  Momentum indicator shifted higher from near overbought zone, allowing additional upside probing.

For the near term, the market has carved out key short-term resistance and support levels for traders to monitor.  If S&P holds above 2750, then a retest of 2817, or the October-March highs, would be easier to be achieved.

Support is at the early February bullish breakaway gap, around 2720.  A close below that level would bring the trend channel moving average, currently at 2673, into view.

Short-term trading range: 2750 to 2817.  S&P has support near 2750.  A close below that level has measured move to 2680.  The index has resistance near 2817.  A close above that level has measured move to 2900.

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 tested and held support at the early February bullish breakaway gap.  While Monday’s rally had improved the posture of our short-term indicators, which supportive of further upside probing, follow-through is the key.  S&P has 2817 to trade against.  If that were to break, we could see 2900 next.

 

Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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