S&P Will Test 2860 before a Significant Pullback Unfolds

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Monday April 1, 2019.

Stocks rose on Friday amid renewed optimism on the progress of trade talks between Washington and Beijing.  For the day, the Dow Jones Industrial Average rose 0.8 percent to 25,928.68. The S&P advanced 0.7 percent to 2,834.40. The Nasdaq Composite climbed 0.8 percent to 7,729.32.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell 5 percent to 13.71.

Base metals attracted strong buying support as traders liked to hear that the U.S. and China held “constructive” trade talks in Beijing this week, according to Treasury Secretary Steven Mnuchin and the White House. Trade talks will continue next week in Washington with China’s Vice Premier Liu He.  As such, Invesco DB Base Metals Fund: (DBB) climbed 1.43 percent on the day and is up nearly 11 percent YTD, slightly underperformed the S&P.  Now the question is whether the rally has more legs?  Below is an update look at a trade in DBB.

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 – Invesco DB Base Metals Fund: (weekly)

Our “U.S. Market Trading Map” painted DBB bars in green (buy) – see area ‘A’ in the chart.  Over the past few weeks, DBB has been basing sideways after the early 2019 rally ran out of steam near the 1-year moving average.  That level was significant when the ETF fell below it in summer 2018.  Last week’s rally has helped push DBB above the 1-year moving average, signify a bullish breakout.  This is a bullish development and opened up for a retest of the 2018 high, just below 20.  Resistance stands in the way of continue tally is around 17.50, based on the 23.6% Fibonacci retracement.

DBB has support near 16.20.  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 29, 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”]

Once again, the S&P climbed above the lower boundary of the pink band after recent pullback found support near the high 2780s.  Friday’s rally pushed the index above the late March falling trend line, signify an upside reversal and bullish breakout.  Money Flow measure is flattening near the zero line, indicating a lack of commitment.  Momentum has been strengthened but the return of overbought conditions on an intraday basis will put a cap on the upside.  With this in mind, we’d look to reduce exposure into overbought strength, which might take the S&P closer to 2860 before a significant pullback unfolds.

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, S&P broke above the late March falling trend line, signify an upside reversal and bullish breakout.  Nevertheless, the return of overbought conditions on an intraday basis will put a cap on the upside.  As for strategy, traders should consider taking down exposure into overbought strength, which might take the S&P closer to 2860 before a significant pullback unfolds.

 

Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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