S&P Bearish Engulfing Pattern Signals Trend Reversal

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 May 2, 2019.

We’ve noted in the previous Market Outlook that: “overbought conditions have returned on a daily basis but momentum remains supportive so downside risk could be limited. It is possible that S&P could continue to drift higher as trading sentiment remains strong.  As for strategy, traders should look to reducing exposure into overbought strength or at least buying downside protection for winning positions.”  As anticipated, S&P set new all-time high in early Wednesday session following report that a U.S.-China trade deal could be announced by next Friday.  The market however, gave back all of the early gains and some more to close lower after Fed Chair Jerome Powell dismissed the idea of a rate-cut to address low inflation.  For the day, the bench mark gauge fell 0.8 percent to 2,923.73.  The tech-heavy Nasdaq Composite declined 0.6 percent to 8,049.64. The Dow Jones Industrial Average percent gave up 0.6 to 26,430.14.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, surged nearly 13 percent to close at 14.80.

Ten of the 11 S&P sectors finished lower, led by energy.  The weakness in the energy space was also driven by lower oil prices.  U.S. crude futures settled 31 cents lower at $63.60 per barrel after U.S. crude inventories soared more than expected to their highest since September 2017 as production hit a record high.  As such, the Energy Select Sector SPDR ETF (XLE) fell 2 percent on the day but is up 13 percent YTD, slightly underperform the S&P.  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 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 red (sell) – see area ‘A’ in the chart.  Over the past few weeks, XLE has been trending lower in a short-term corrective mode after the early 2019 rally ran out of steam near the 1-year moving average, a key technical level based on moving averages.  Right now, the most important thing to watch is trading behavior as the 64 zone is tested as support.  That level is significant in charting terms.  A close below that level will confirm last week’s bearish signal and a retest of the late 2018 low, just above 53, should be expected.

XLE has resistance near 69.  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 bearish (sell).  Last changed May 1, 2019 from bullish (buy) (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 the early rally attempt ran out of steam near the lower boundary of the red band.  In accordance to the Japanese candlestick pattern recognition, Wednesday’s massive bearish engulfing bar is a clear indication of buyers losing momentum.  Technically speaking, when this pattern formed after an upswing in the market, it can be an indication of a trend reversal.  Perhaps the lagging Money Flow measure, which peaked in February and printed series of lower highs as prices ascending, is the best illustration of the bears’ case.  Over the next few days, traders should monitor the retreat and rebound behaviors as the 2900 zone is tested as support.  A close below that level will confirm Wednesday’s bearish signal and has measured move to around 2846, or the trend channel moving average.

Short-term trading range: 2900 to 2950.  S&P has support near 2908-2900.  A close below that level has measured move to 2846.  The index has resistance near 2950.  A close above that level has measured move to around 3000, 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, Wednesday’s massive bearish engulfing bar suggested that suggested that S&P is at or very close to a significant short-term top. Near-term risk is to the downside.  Traders should consider buying downside protection on winning positions.


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.