S&P Broke Key Support but Follow-through is Key

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Tuesday March 26, 2019.

We’ve noted in the previous Market Outlook that: “S&P broke several supports last week.  When key supports broke it means that long-term buying pressure has finally been exhausted.  The stronger the support level, the more powerful the selloff.  Nevertheless, support is strong near the 2800-2750 zone.  This could help minimize downside follow-through and widespread breakdowns.”  As anticipated, the S&P sold off in early Monday session, traded as low as 2785 before buyers stepped in and pushed prices off the intraday low.  For the day, the bench mark gauge decreased 0.1 percent.  The Nasdaq Composite also lost 0.1 percent. The Dow Jones Industrial Average outperformed with gain of 0.1 percent.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell nearly 1 percent to 16.33.

U.S. Treasury yields steadily declined throughout the day on dwindling growth expectations. The 10-year yield dropped four basis points to 2.42% after briefly touching 2.39% – its lowest level since December 2017.  Homebuilding stocks outperformed amid the continued drop in rates, providing strong support for the iShares U.S. Home Construction ETF (ITB), which jumped 2.21 percent on the day and is up 17 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 ITB.

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 – iShares U.S. Home Construction ETF (weekly)

Our “U.S. Market Trading Map” painted ITB bars in green (buy) – see area ‘A’ in the chart.  Over the past few weeks. ITB has been trending lower in a short-term corrective mode after the late December rally ran out of steam near the 2-year moving average, a key technical level based on moving averages. The correction tested and respected support near the 4-year moving average.  This week’s rally pushed the ETF above the March falling trend line, signify a bullish reversal.  Over the next few weeks, traders should monitor trading behavior as the 37 zone is tested as resistance.  A close above that level will bring the early 2018, just above 46, back into view.

ITB has support near 33.  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 bearish (sell).  Last changed March 22, 2019 from bullish (buy) (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 Monday session was a close below the important sentiment 2800 mark.  That level was significant when the index climbed above it in early March.  This is a negative development, signify a bearish reversal.  Money Flow measure fell below the zero line, suggesting that the bears are more aggressive as prices dropped than the bulls were as prices ascended.  Right now follow-through is the key.  A consecutive close below 2800 will confirm the bearish signal and a test of the more important support near the 2750-2740 zone should be expected.

Short-term trading range: 2750 to 2880.  S&P has support near 2750.  A close below that level has measured move to 2690.  The index has a strong band of resistance between 2830 and 2880.

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 broke key support Monday, signify a bearish trend reversal with near-term downside target near 2750.  Nevertheless, it will be important to monitor the retreat and rebound 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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