S&P Constrained by Short-term Sideways Trend

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Monday August 12, 2019.

We’ve noted in the previous Market Outlook that: “S&P climbed above key resistance in a reflection of an improved short-term momentum.  Nevertheless, given the damages done over the past few days, some backings and fillings should be expected.”  As anticipated, stock retreated Friday after Donald Trump told reporters that the U.S. will not be doing business with Huawei and that September trade talks could get canceled.  For the day, the S&P dipped 0.7 percent to 2,918.65 while the Nasdaq Composite pulled back 1 percent to 7,959.14.  The Dow Jones Industrial Average gave up 0.3 percent to 26,287.44. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, jumped more than 6 percent to 17.97.

Eight of the 11 S&P 500 sectors finished lower, led by the energy and information technology sectors. Energy stocks fell despite the sharp increase in oil prices while the tech sector was pressured by shares of semiconductor companies, many of which derive substantial revenue from China.  Conversely, the defensive-oriented health care, real estate, and utilities sectors were the lone sectors that finished higher.  As such, the Utilities Select Sector SPDR ETF (XLU) added 0.12 percent on the day, bringing its year-to-date gain up to 15 percent, slightly underperformed 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.  Over the past few weeks, XLU has been trending lower in a short-term corrective mode after the late 2018 rally ran out of steam just above the 61 zone.  The correction tested support at the 23.6% Fibonacci retracement.  This week’s bullish engulfing bar is a clear indication of demand overwhelming supply.  This is a positive development, opened up for a retest of the late June high, near 61.40.  a close above that level has measured move to around 64.40, or the 127.2% Fibonacci extension.

XLU has support near 59.  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 August 8, 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 retreated after recent rally attempt ran into resistance at the trend channel moving average.  This level was significant when the S&P fell below it last week.  Momentum indicator shifted lower from near oversold zone, indicating an internal weakness.  Money Flow measure hovers just below the zero line, indicating a negative net demand for stocks.  These elements suggesting further backings and fillings likely.

The early August breakaway gap, around 2933, represents key resistance. We’d turn particular positive if the index closes twice above that level. As for support, the important sentiment 2800 mark is the line in the sand. 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 and we’re looking at 2700.

Short-term trading range: 2900 to 2936. S&P has support near 2900. A close below that level has measured move to 2800. The index has resistance near 2936. A close above that level has measured move to 2970.

Long-term trading range: 2800 to 3200. S&P has support near 2800. A close below that level has measured move to 2500. The index has resistance near 3080. A close above that level has measured move to 3200.

In summary, trading behavior in the S&P constrained by a short-term sideways pattern and shown little evidence of a sustainable change in trend. For now, 2933 is the line in the sand. We’d turn particular positive if the index closes twice above that level.

Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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