S&P Will Breakout To New High As Soon As Market Shakes Off Excessive Bullishness

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Thursday June 13, 2019.

Stocks fell for a second day on Wednesday, pressured by declines in tech and bank shares.  For the day, the S&P closed 0.2 percent lower at 2,879.84. The Nasdaq Composite lagged, sliding 0.4 percent to 7,792.72.  The Dow Jones Industrial Average lost 0.2 percent to close at 26,004.83.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, closed little change at 15.91.

High expectations for the Fed to signal for a rate cut in its policy meeting next week were bolstered by soft inflation data in the Consumer Price Index (CPI) for May.  The 2-year yield declined four basis points to 1.89 percent, and the 10-year yield declined one basis point to 2.13 percent.  The financial sector was undercut by lower Treasury yields and by shares of Wells Fargo (WFC) after it warned net interest income for 2019 will be at the low end of prior guidance.  As such, the Financial Select Sector SPDR ETF (XLF) fell 1 percent on the day but is up nearly 14 percent YTD, slightly underperformed 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 XLF.

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 – Financial Select Sector SPDR ETF (weekly)

Our “U.S. Market Trading Map” painted XLI bars in red (sell) – see area ‘A’ in the chart. Over the past few weeks, XLF had been trending higher in a short-term corrective mode after the early May correction found support near the 3-year moving average, a key technical level based on moving averages.  The rally retested and failed at the 2018 falling trend line.  This week’s bearish reversal bar suggested that the oversold bounce ran its course and a retest of support at the 26 zone is likely.  That level is significant in charting terms.  A close below it on a weekly basis will bring the 24 zone back into view.

XLF has resistance near 28.  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 June 4, 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”]

S&P moved down to test support at the trend channel moving average after recent rally attempt ran out of steam near the important sentiment 2900 mark.  Market internal has been weakened but downside momentum does not appear strong enough to generate a widespread breakdown.  Money Flow measure flashed a bearish signal as it fell below the zero.  These elements will continue negatively affect trading sentiment over the coming days.

Right now the most important to watch is the retreat and rebound behavior as the trend channel moving average, currently at 2873, is tested as support. A failure to hold above key support suggested that most of the potential buyers at this level had already placed their bets.  The next batch of buyers typically sits at a much lower level.

Short-term trading range: 2873 to 2900.  S&P has support near 2872.  A close below that level has measured move to 2833.  The index has resistance near 2900.  A close above that level has measured move to 2950-3000.

Long-term trading range: 2668 to 3000.  S&P has support near 2668.  A close below that level has measured move to 2550.  The index has resistance near 2780.  A close above that level has measured move to 2900.

In summary, recent trading actions leaving the S&P in what looks to us like an orderly high level consolidation of the early June rally.  The index is holding firmly above the trend channel moving average, a level it has not breached since market down in mid-May.  This is a positive development, increased the probability that the S&P will break out to new highs as soon as the market shakes off excessive bullishness.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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