S&P Constrained by Short-term Sideways Pattern

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Wednesday March 27, 2019.

Stocks rose on Tuesday as an early uptick in U.S. Treasury yields and gains in most global equity markets helped foster some risk-on sentiment.  The Dow Jones Industrial Average gained 0.6 percent to 25,657.73.  The S&P closed up 0.7 percent at 2,818.46. The Nasdaq Composite gained 0.7 percent to close at 7,691.52.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell more than 10 percent to 14.68.

Oil rose sharply on Tuesday as OPEC supply cuts and expectations of lower U.S. inventories outweighed concern about weaker demand due to an economic slowdown.  U.S. crude added 1.9 percent to settle at $59.94. WTI traded above $60 earlier in the day.  Many energy stocks benefited from an increase in oil prices.  As such, the Energy Select Sector SPDR ETF (XLE) rose 1.44 percent on the day and is up about 16 percent YTD, outperformed the S&P.  Now the question is whether the rally has more legs?  Below is an update look at a trade in XLE.

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 – Energy Select Sector SPDR 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. XLE has been basing sideways using the 50% Fibonacci retracement as support after the late 2018 rally ran out of steam near the 38.2% Fibonacci retracement.  This week’s bullish reversal suggested that the support would hold. Right now, the most important thing to watch is trading behavior near the 68 zone.  A close above that level signify a bullish breakout and opens the door for a retest of the 2018 high, around 78.

XLE has support near 64.  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”]

S&P rebounded nicely after recent pullback found support near the important sentiment 2800 mark.  The big picture remains the same. There is a consolidation within the 2800 and 2860 trading range, which represents digestion period in the after math of the early March rally.

Money Flow measure climbed above the zero line, indicating an increase in buying pressure.  This is a positive development but momentum is not favorable over the short to medium term.  So it should not be surprising to see some backing and filling in the coming days.  Last week’s pivot high of 2860 marks an inflection point.  A close above that level signify resumption of the multi-month rally and trigger acceleration toward 2900.  As for support, 2800 is the line in the sand.  We’d turn particular bearish if the index closes twice below that level.

Short-term trading range: 2750 to 2880.  S&P has support near 2800.  A close below that level has measured move to 2750.  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, recent trading behavior in the S&P constrained by a short-term sideways pattern and shown little evidence of a sustainable change in trend.  2800 is the line in the sand.  A failure to hold above that level would trigger a new downswing and an unwelcome pickup in downside volatility but for now it looks firm.

 

Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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