S&P Vulnerable To Some Downside Retracement

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 23, 2019.

We’ve noted in the previous Market Outlook that: “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.”  As anticipated, stocks wavered with modest losses on Wednesday, leaving the S&P down 0.3 percent, amid persisting trade uncertainty. The Dow Jones Industrial Average lost 0.4 percent to 25,776.61.  The Nasdaq Composite declined by 0.5 percent to 7,750.84.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell more than 1 percent to close at 14.75.

Trade uncertainty fostered some defensive positioning in U.S. Treasuries and in defensive sectors.  Utilities, health care, consumer staples, and real estate all closed higher.  As such, the Utilities Select Sector SPDR ETF (XLU) rose 0.75 percent on the day and is up more than 12 percent YTD, slightly under performed the S&P.  Now the question is whether the rally has more legs?  Below is an update look at a trade in XLU.

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 – Utilities Select Sector SPDR ETF (weekly)

Our “U.S. Market Trading Map” painted XLU bars in green (buy) – see area ‘A’ in the chart.  XLU has been on a tear in recent weeks after the late March correction found support near the prior high set in late 2017.  That level roughly corresponds with the 20-week moving average, a key technical level based on moving averages. This week’s rally pushed the ETF above the March high, signify a bullish breakout and upside reversal.  This is a positive development, opened up for a test of the more important resistance near the 61.50 zone, or the 127.2% Fibonacci extension.

XLU has support near 57.  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 22, 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 retreated after recent test of resistance at the trend channel moving average was met with a new wave of selling interest.  The index is now at a key juncture.  It is testing formidable resistance from below.  Money Flow measure is not favorable over the intermediate term.  The indicator has raised a yellow flag as it diverged from price action after peaking in February.  This negative development suggested this is not time to be long stocks.

For now, 2800 is the line in the sand.  A close below that level will trigger another selloff with initial downside target near 2780. 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 2890.  S&P has minor support near 2800.  A close below that level has measured move to 2780.  The index has resistance near 2873.  A close above that level has measured move to 2890.

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 is at key technical juncture.  It is testing formidable resistance from below.  A failure to climb above key price level means that long-term buying pressure has finally been exhausted.  On balance, we remain near term negative for S&P as we believe market vulnerable to some downside retracement over the short-to-intermediate term.

 

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.