S&P Vulnerable to Some Short-term Downside Retracement

Editor’s note: this column was originally published on Capital Essence’s CEM News. It’s being republished as a bonus for the loyal readers. For more information about subscribing to CEM News, please click here.

 

Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Monday March 18, 2019.

Stocks closed higher Friday as investors cheered renewed optimism on the U.S.-China trade front.  The Dow Jones Industrial Average added 0.5 percent to 25,848.87.  The S&P rose 0.5 percent to 2,822.48. The Nasdaq Composite climbed 0.8 percent to 7,688.53.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell more than 4 percent to 12.88.

The semiconductor space rallied following Broadcom (AVGO) better-than-feared earnings report and called for the industry to hit a bottom in the second quarter. The Philadelphia Semiconductor Index jumped nearly 3 percent.  Many of its components helped drive the outperformance of the tech sector.  As such, the Technology Select Sector SPDR ETF (XLK) rose 1.21 percent on the day and is up nearly 18 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. XLK has been on a tear in recent days after the late 2018 selloff found support near the 38.2% Fibonacci retracement of the 2015-2018 upswing.  Last week’s rally pushed the ETF above the early March congestion zone, signify an upside reversal and bullish breakout.  This is a positive development, setting the stage for a retest of the 2018 highs, just above 76.  A close above that level has measured move to around 88, or the 127.2% Fibonacci extension.

XLK has support near 69.30.  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 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”]

Key technical development in Friday session was a clear break above 2817.  That level was significant when the S&P tested and failed in early March.  This is a positive development but let’s notice that Money Flow measure did not confirm the breakout as the indicator is well below its February peak.  Additionally, the short-term overbought will give the bulls more pressure than they have already had. So it should not be surprising to see some kind of a pullback, the way we had in early February and March, prior to the new upswing.

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 2800, then a retest of the 2018 highs, around 2940, would be easier to be achieved

Short-term trading range: 2800 to 2878.  S&P has support near 2800.  A close below that level has measured move to 2750.  The index has resistance near 2880.  A close above that level has measured move to 2940.

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 resistances, breaking out to multi-month high.  However, market is short-term overbought following recent advance. There could be a sell-off in the offing but it would be shallow if so.

 

Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

© All rights reserved and actively enforced.
Note: This is a free edition of The Market Outlook, a daily CEM News subscriber newsletter. To get this column before market opens together with hundreds of technical trading ideas (including stocks and ETFs) every month, please click here.
Subscribe to CEM News to receive more in-depth research from Capital Essence.