S&P Dances into Increasingly Tight Trading Range

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Monday April 22, 2019.

We’ve noted in the previous Market Outlook that: “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.”  As anticipated, stocks sold off in early Thursday session that saw the S&P traded as low as 2891.90 beofre buyers stepped in and pushed prices off the intraday low.  For the day, the bench mark gauge added 0.2 percent to end the day at 2,905.03. The Nasdaq Composite closed just above the flatline at 7,998.06.  The Dow Jones Industrial Average rose 0.4 percent to close at 26,559.54.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell 4 percent to 12.09.

The industrials sector also benefited from a host of solid earnings reports, which included those from Union Pacific (UNP), Honeywell (HON), United Rentals (URI), Danaher (DHR), Dover (DOV), and Snap-On (SNA).  As such, the Industrial Select Sector SPDR ETF (XLI) rose 1.15 percent on the day and is up more than 21 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 XLI.

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 – Industrial Select Sector SPDR ETF (weekly)

Our “U.S. Market Trading Map” painted XLI bars in green (buy) – see area ‘A’ in the chart.  XLI has been on a tear in recent weeks after the early March correction found support near the 2-year moving average, a key technical level.  Last week’s rally pushed the ETF above the March high, signify an upside reversal and bullish breakout.  This is a positive development, supporting further upside follow-through and a test of the more important resistance near the 80-81 zone.  A close above 81 will trigger acceleration toward the 90 zone, based on the 127.2% Fibonacci extension of the 2016-2018 upswing.

XLI has support near 73.  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”]

The big picture remains the same.  There is a consolidation near the important sentiment 2900 zone.  That level roughly corresponds with the lower boundary of the red band.  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 2866 would see a pickup in near-term volatility.

Short-term trading range: 2893 to 2940.  S&P has support near 2893.  A close below that level has measured move to 2866.  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, there is a consolidation near the important sentiment 2900 zone.  Technical pressures are building up as the market dances its way into an increasingly tight trading range. S&P’s 2866 marks the inflection point.  A failure to hold above key level indicates a change in sentiment and a much deeper pullback should be expected.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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