S&P Breaking Out From Short-term Downward Trend

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Friday May 17, 2019.

Stocks closed higher Thursday, boosted by positive earnings reports from Cisco Systems (CSCO) and Wal-Mart (WMT).   The Dow Jones Industrial Average rose 0.8 percent to close at 25,862.68, led by Walmart and Cisco. The S&P 500 gained 0.9 percent to close at 2,876.32 while the Nasdaq Composite advanced 1 percent to 7,898.05.   The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell more than 7 percent to close at 15.29.

Homebuilder sentiment saw a stronger-than-expected increase in May.  The NAHB sentiment survey rose more than expected to 66 from 63 and expectations of 64.  As such, the SPDR S&P Homebuilders ETF (XHB) rose 0.75 percent on the day but is up more than 24 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 XHB.

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 – SPDR S&P Homebuilders ETF (weekly)

Our “U.S. Market Trading Map” painted XHB bars in green (buy) – see area ‘A’ in the chart.  Over the past few weeks, XHB has been trending lower after the late 2018 rally ran out of steam near the spring-summer 2018 highs.  The correction tested and respected support at the 2-year moving average, a key technical level based on moving averages.  That level was significant when the ETF climbed above it in early 2019.  This is a positive development, opened up for a retest of the early May high, just below 42.  A close above that level has measured move to 47, or the 2018 high.

XHB has support near 39.  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 May 15, 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”]

Key technical development in Thursday session was a clear break above the trend channel moving average. That level was significant when the index fell below it last week and struggled to get past it.  Money Flow measure trended higher above the zero line, indicating a positive net demand for stocks.  This is a bullish development but momentum does not appear strong enough to generate a decisive breakout so it should not be surprising so see some backing and filling over the next couple of days.  Nevertheless, prior resistance has now turned into support, so the path with least resistance remains higher as long as the S&P holds above 2866.

For now, 2800 is the line in the sand.  A close below that level would see a massive pickup in volatility.

Short-term trading range: 2866 to 2864.  S&P has support near 2866.  A close below that level has measured move to 2800.  The index has resistance near 2900.  A close above that level has measured move to 2954.

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 cleared key technical resistance, breaking out from the short-term downward trend.  The breakout would be confirmed on a weekly close above 2866, which would support near-term upside follow-through and a test of more important resistance in the 2900-2950 zone.

 

Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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