S&P’s Upside Gains to be Limited by Overbought Conditions

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 July 11, 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 high level consolidation of the late June rally.  The index is ticking ever closer to 3000.  Some aggressive traders might use this level like a magnet to sell against, but it doesn’t have much significance outside of just being a nice round number.”  As anticipated, S&P briefly surpassing 3000 for the first time after Fed Chair Powell fueled the market’s expectations for a rate cut at the July 30-31 FOMC meeting.  The bench mark gauge however, gave back some of the early gains, to close at 2,993.07, up 0.5 percent.  The Dow Jones Industrial Average added 0.3 percent and the Nasdaq Composite gained 0.8 percent.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell nearly 8 percent to close at 13.03.

Oil prices gained more than 4 percent a barrel on Wednesday after U.S. crude inventories shrank more than expected and as major producers’ evacuated rigs in the Gulf of Mexico ahead of an expected storm.  U.S. West Texas Intermediate crude futures climbed $2.60, or 4.5 percent, to $60.43 a barrel.  As such, the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) jumped 2.13 percent on the day and is up about 1 percent YTD, underperformed the S&P.  Now the question is whether the rally has more legs?  Below is an update look at a trade in XOP.

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 Oil & Gas Exploration & Production ETF (weekly)

Our “U.S. Market Trading Map” painted XOP bars in green (buy) – see area ‘A’ in the chart. There is a distinct possibility that a W-shape pattern is forming in the daily chart of XOP.  The late April downswing tested and respected support at the prior low set in late 2018.  The late June rally is heading toward the 29 zone.  That level is significant in charting terms. A close above that level will trigger acceleration toward the early 2019 high near 33.30.  A sustain breakout above 33.30 suggested that the bullish W-shape pattern has resolved itself into a new upswing with potential upside target near 42.

XOP has support just below 25.  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 28, 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”]

As expected, the S&P moved up to test the massive 2-conjoining resistance, the lower boundary of the red band and the important sentiment 3000 mark, after recent pullback found support near the late June breakout point.  In accordance to the Japanese candlestick pattern recognition, Wednesday’s bearish topping tail candlestick is a clear indication of supply overwhelming demand.  Adding to concerns is the overbought conditions.  These elements will put a cap on the upside.

Short-term trading range: 2960 to 3000.  S&P has a minor support near 2986.  A close below that level has measured move to 2960-2940.  The index has resistance near 3000.  A close above that level has measured move to 3050.

Long-term trading range: 2800 to 3200.  S&P has support near 2890.  A close below that level has measured move to 2800.  The index has resistance near 3070.  A close above that level has measured move to 3200.

In summary, S&P’s quick run is showing some signs of exhaustion. Notice how the index struggled to get pass the important sentiment 3000 mark.  While downside risk is limited at the moment, the return of overbought conditions on the daily chart does not favor a sustain breakout. With this in mind we’d consider increase exposure into short-term dips rather than chasing breakouts.

 

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.