S&P’s 3000 is the Line in the Sand

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Wednesday July 31, 2019.

We’ve noted in the previous Market Outlook that: “there is a high probability that S&P is in for a ‘range-bound’ trading environment.  Nevertheless, the overall technical backdrop remains positive so traders should consider buying short-term market dips.”  As anticipated, stocks sold off in the early Tuesday session that saw the S&P fell down 0.7 percent and hanging just above the 3000 level before buyers stepped in and pushed prices off the intraday low.  For the day, the bench mark gauge slipped 0.3 percent to 3,013.18. The Nasdaq Composite dipped 0.2 percent to 8,273.61.  The Dow Jones Industrial Average gave up 0.1 percent to close at 27,198.02.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, jumped more than 5 percent to close at 12.83.

Energy stocks gained traction as oil prices made a big move in the afternoon on no confirmed news catalyst. The noticeable gain today could have been derived from speculation that the Fed’s expected rate cut tomorrow could increase demand for oil.  As such, the Energy Select Sector SPDR ETF (XLE) rose 1.13 percent on the day, bringing its year-to-date gain up to just nearly 10 percent, underperformed the S&P.  Now the question is whether the rally has more legs?  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 trending lower after the early June recovery rally ran into resistance near the 2-week moving average.  This level was significant when the ETF fell below in in early May.  The July downswing is testing support at the late 2018 rising trend line.  This week’s bullish reversal suggested that support would hold.  Nevertheless, given looming resistance near the 64 zone, there is no reason to turn particularly bullish until this zone is eclipsed.  XLE has minor support just below 62.  A close below that level will break the multi-month upswing and a retest of the 2018 low, around 53, should be expected.

XLE has resistance near 64.  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 July 30, 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 moved down to test support at the important sentiment 3000 mark after last week’s rally ran out of steam just above the prior high set in mid-July.  The big picture remains the same. There is a consolidation near the lower boundary of the pink band, which represents digestion period in the after math of the June rally.  Money Flow measure and momentum had been deteriorated but downside momentum does not appeared strong enough to generate widespread breakdowns.  The lower boundary of the pink band, around 3000, is the line in the sand.  A failure to hold above that level would see an unwelcome pickup in downside volatility and a test of the more significant support in the 2900 zone should be expected.

Short-term trading range: 3000 to 3085.  S&P has support near 3000.  A close below 3000 has measured move to 2900.  The index has minor resistance near 3016.  A close above that level has measured move to 3085.

Long-term trading range: 2800 to 3200.  S&P has support near 2948.  A close below that level has measured move to 2800.  The index has resistance near 3080.  A close above that level has measured move to 3200.

In summary, recent trading actions leaving the S&P in what looks to us like a back-and-forth consolidation of the June rally.  This week’s correction is testing support at the lower boundary of the pink band.  This level was tested several times over the past months.  It’d be important to monitor the retreat and rebound behaviors.  We’d turn particular bearish if S&P closes twice below that level.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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