Outside Reversal Bar In S&P Warns of Potential Trend Shifts

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 Thursday April 18, 2019.

Stocks closed lower Wednesday as sharp losses in the health-care sector offset strong quarterly earnings results.  For the day, the S&P fell 0.2 percent to 2,900.45.  The Dow Jones Industrial Average finished flat at 26,449.54.  The Nasdaq Composite gave up 0.05 percent to close at 7,996.08.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, rose more than 3 percent to 12.60.

Health care stocks continued to remain out of favor.  The sector’s sharp losses came after UnitedHealth CEO David Wichmann warned that proposals pushed by Democratic lawmakers, such as “Medicare for All,” would “surely jeopardize the relationship people have with their doctors, destabilize the nation’s health system and limit the ability of clinicians to practice medicine at their best.”  As such, the Health Care Select Sector SPDR ETF (XLV) fell 2.88 percent on the day and is down about 1 percent YTD, underperformed the S&P by a wide margin.  Now the question is whether this week selloff is a beginning of an end or there’re more pains ahead?  Below is an update look at a trade in XLV.

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 – Health Care Select Sector SPDR ETF (weekly)

Our “U.S. Market Trading Map” painted XLV bars in red (sell) – see area ‘A’ in the chart.  XLV sold off sharply after falling below the 1-year moving average, a key technical level, on Tuesday.  The ETF is now testing support at the 2-year moving average following Wednesday’s massive selloff.  This level is significant in charting terms.  It was tested in late 2018.  A close below that level signify a bearish breakout and a retest of the more important support near the 80 zone should be expected.

XLV has resistance just above 89.  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 April 10, 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, S&P sold off after early rally attempt ran into resistance at the lower boundary of the red band.  In accordance to the Japanese candlestick pattern recognition, Wednesday’s bearish outside reversal bar is a clear indication of supply overwhelming demand.  This pattern is often associated with key turning point particular when it formed near important price level.  Additionally, short-term momentum had shifted lower from near overbought level, suggesting that additional downside weakness likely. Right now follow-through is the key.  A close below 2900 will confirm the bearish signal and a test of the more important support near the 2890-2860 zone should be expected.  That area represents a major price support and if declines are seen below it, a massive new downswing in price will follow.  And we’re looking at 2800.

Longer term, market internal has weakened but downside momentum does not appear strong enough to generate major breakdowns.  Money Flow measure is flashing a weak bearish signal as it diverged from price action since late March.  The S&P took out the February and March highs while the indicator set a series of lower highs.  While more backing and filling would not be a surprise, a close below 2860 would see a massive pickup in volatility.

Short-term trading range: 2890 to 2940.  S&P has support near 2890.  A close below that level has measured move to 2860.  The index has resistance near 2940.  A close above that level has measured move to around 2970, or the upper boundary of the red band.

Long-term trading range: 2770 to 2990.  S&P has support near 2770.  A close below that level has measured move to 2660.  The index has resistance near 2990.  A close above that level has measured move to 3100.

In summary, Wednesday’s outside reversal bar together with the fact that the S&P is facing strong technical resistance after rising more than 100 points since late March warns of potential trend shifts.  But the overall technical backdrop remains bullish, so we’d consider purchase stocks during declines in the market and stay bullish as long as the S&P holds above 2860.

 

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.