S&P in Orderly Low Level Consolidation Phase

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

Stocks closed higher on Tuesday following news that the U.S. temporarily eased restrictions on Chinese telecom giant Huawei.  For the day, the Dow Jones Industrial Average rose 0.8 percent to 25,877.33. The S&P gained 0.9 percent to end the day at 2,864.36.  The Nasdaq Composite advanced 1.1 percent to 7,785.72.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell more than 8 percent to close at 14.95.

Homebuilders stocks attracted strong buying support following report that that overall sales activity remained light despite a drop in mortgage rates and a pickup in income, demonstrating that limited inventory and relatively high prices continue to impede existing home sales. Existing home sales decreased 0.4 percent month-over-month in April to a seasonally-adjusted annual rate of 5.19 million from an unrevised 5.21 million in March. Total sales were 4.4 percent lower than the same period a year ago.  As such, the SPDR S&P Homebuilders ETF (XHB) jumped 1.84 percent on the day and 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 in a short-term corrective mode after the early 2019 rally ran out of steam near the summer 2018 highs.  The correction tested and respected support at the 2-year moving average, a key technical level based on moving averages. This week’s bullish reversal opened up for a retest of formidable resistance at the 41-42 zone.  A close above that level signify a bullish breakout with upside target near 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 shifted to bullish (buy).  Last changed May 21, 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 moved up to test resistance at the trend channel moving average after recent pullback found support near 2800.  Money Flow measure trended higher from above the zero line, indicating an increase in buying pressure.  This is a positive development.  The index could signal an upward trajectory, depending on how it closes over the next few days.  For now, 2800 is the line in the sand.  A close below that level will trigger another selloff with initial downside target near 2777. The upper limit of the one week sideways trading range, just below 2900, represents key price level.  A close above that level could trigger acceleration toward the early May high, near 2950.

Short-term trading range: 2800 to 2892.  S&P has minor support near 2800.  A close below that level has measured move to 2777.  The index has resistance near 2872.  A close above that level has measured move to 2892.

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, recent trading actions leaving the S&P in what looks to us like an orderly low level back-and-forth consolidation of the May downswing.  There is a high probability that the upper and lower limit of a short-term trading range has been set between the 2800 and 2900 levels on the S&P.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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