Looming S&P Breakout

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Tuesday April 23, 2019.

We’ve noted in the previous Market Outlook that: “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.”  As anticipated, stocks closed mix Monday as traders positioned ahead of the busiest week of the corporate earnings season.  For the day, the S&P added 0.1 percent to 2,907.97. The Nasdaq Composite climbed 0.2 percent to 8,015.27.  The Dow Jones Industrial Average fell 0.2 percent to 26,511.05.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell 4 percent to 12.09.

Oil prices rose after the U.S. decided to end its waivers for countries to import oil from Iran.  WTI crude settled above $65 per barrel, hitting its highest level since Oct. 31 and underpinning the outperformance of energy sector.  As such, the Energy Select Sector SPDR ETF (XLE) jumped 2.11 percent on the day and is up nearly 20 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 XLE bars in green (buy) – see area ‘A’ in the chart.  XLE has been on a tear in recent months after the October 2018 correction found support near the early 2016 recovery low.  This week’s rally pushed the ETF above 4-year moving average, a key technical level, 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 70 zone.  A close above it will trigger acceleration toward the 2017-2018 highs, around 78.

XLE has support near 66.  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 rebounded nicely after the early dip was met with a new wave of buying interest.  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. Nevertheless, Money Flow measure is above the zero line, indicating a positive net demand for stocks.  This could help putting a short-term floor under the market.  While more backing and filling would not be a surprise, a close below 2870 would see a pickup in near-term volatility.

Short-term trading range: 2896 to 2940.  S&P has support near 2896.  A close below that level has measured move to 2870.  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, the big picture remains the same. There is an orderly high level consolidation near S&P’s 2900, which represents digestion period.  There is a high probability that the S&P will break out from current trading range as soon as the market shakes off weak hands bulls.

 

Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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