Path With Least Resistance Remains Higher As Long As S&P Holds Above 2900

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 25, 2019.

We’ve noted in the previous Market Outlook that: “return of overbought conditions as S&P moved up to test key technical level does not favor a sustain breakout.  On balance, we’re cautiously optimistic on stocks over the short-term and look to trim positions into overbought strength.”  As anticipated, S&P slipped from record levels on Wednesday as Wall Street digested a mixed batch of corporate earnings.  For the day, the bench mark gauge dipped 0.2 percent to 2,927.25.  The Dow Jones Industrial Average gave up 0.2 percent to close at 26,597.05. The Nasdaq Composite ended the day down 0.2 percent at 8,102.01 after hitting an intraday record. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, jumped more than 6 percent to 13.03.

Industrial sector finished slightly lower amid a mixed set of earnings reports, which included those from Boeing (BA), Caterpillar (CAT), Northrop Grumman (NOC), and Norfolk Southern (NSC).  As such, the Industrial Select Sector SPDR ETF (XLI) fell 0.3 percent on the day but is up nearly 22 percent YTD, outperformed the S&P by a wide margin.  Now the question is whether recent pullback is a pause that refreshes or it’s a beginning of something worse?  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 months after the early March correction found support near the 2-year moving average, a key technical level.  The late March rally pushed the ETF above the early March high, signify a bullish reversal and upside breakout.  This week’s upside follow-through confirmed the bullish signal and setting the stage for a test of the more important resistance near the 81 zone, or the early 2018 high.  A close above it will trigger acceleration toward 90, or the 127.2% Fibonacci extension.

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”]

S&P pullback after recent rally ran into resistance at the lower boundary of the red band, the level that has been successfully repelling price actions in the past few months.  In accordance to the Japanese candlestick pattern recognition, Wednesday’s narrow range (or neutral) bar indicates uncertainty – traders refuse to press hard one way or the other just because they are not very sure about the near-term direction.  This explains why market often uses neutral bar to change direction.

Market internal has weakened but downside momentum does not appeared strong enough to generate widespread breakdowns.  So, it should not be surprising to see some backings and fillings in the coming days.

Short-term trading range: 2903 to 2950.  S&P has support near 2903.  A close below that level has measured move to 2884.  The index has resistance near 2940-2950.  A close above that level has measured move to around 2988, or the upper boundary of the red band.

Long-term trading range: 2775 to 3000.  S&P has support near 2890.  A close below that level has measured move to 2775.  The index has resistance near 3000.  A close above that level has measured move to 3115.

In summary, S&P shifted to consolidation mode after the late March rally stalled at the lower boundary of the red band.  Market internal has weakened but downside momentum does not appeared strong enough to generate widespread breakdowns.  While seemingly vulnerable to some short-term weaknesses, the path with least resistance remains to the upside as long as the index holds above 2900.

 

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.