Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Friday May 24, 2019.
We’ve noted in the previous Market Outlook that: “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.” As anticipated, stocks sold off on Thursday, sending the S&P down 1.2 percent, as trade tensions and growth concerns produced a risk-off mindset. The Dow Jones Industrial Average fell 1.1 percent to 25,490.47. The Nasdaq Composite dropped 1.6 percent to 7,628.28. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, surged more than 14 percent to close at 16.92.
Energy stocks were leading the broader stock market’s declines Thursday, as crude oil prices suffered a second-straight sharp selloff amid concerns over both weaker demand and increased supply. Crude oil futures dropped 4.2 percent after falling 2.7 percent on Wednesday. As such, the Energy Select Sector SPDR ETF (XLE) stumbled 3.35 percent on the day but is up 7 percent YTD, underperformed the S&P. Now the question is whether this week’s selloff is a beginning of the downswing or there’re more pains ahead? 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 basing sideways near the 50% Fibonacci retracement of the 2016-2018 upswing after the late 2018 recovery rally ran into resistance near the 1-year moving average, a key technical level based on moving averages. This week’s selloff pushed the ETF below the lower boundary of its 3-week sideway trading range, signify a bearish breakout. This is a negative development, increased the probability for a retest of the late 2018 low, just above 50. A close below 60, or the 61.8% Fibonacci retracement, on a weekly basis will confirm this.
XLE has resistance near 65. 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 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”]
S&P moved down to test support at the 2800 zone after recent rally attempt ran into resistance at the trend channel moving average. That level was significant when the index fell below it last week. It’s now acting as strong resistance. Money Flow measure is not favorable over the short to intermediate term. The indicator is on a verge of turning negative. In fact, it has been 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.
Short-term trading range: 2800 to 2873. S&P has support near 2800. A close below that level has measured move to 2780. The index has resistance near 2848. A close above that level has measured move to 2873.
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, market internal has been deteriorated as S&P moved down to test key support at the important sentiment 2800 zone. This area is too big and too important to fall quickly so it should not be surprising to see some backings and fillings in the coming days.
Thanks and happy trading.
(By：Michelle Mai for Capital Essence)
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