S&P in Reflexive Bounce

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Tuesday August 20, 2019.

We’ve noted in the previous Market Outlook that: “S&P is in a midst of a short-term oversold relief bounce.”  As anticipated, stocks rallied on Friday as a rebound in bond yields eased fears of a recession that sent stocks tumbling earlier in the week.  For the day, the S&P rose 1.2 percent to close at 2,923.65 on Monday in a broad-based advance that extended its rebound rally to a third day.  The Dow Jones Industrial Average added 1 percent to 26,135.79.  The Nasdaq Composite advanced 1.4 percent to end the day at 8,002.81.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell more than 8 percent to 16.93.

Gold prices fell more than 1 percent on Monday as concerns eased that major economies could tip into recession, boosting investors’ affinity for risk and detracted from bullion’s safe-haven allure.  Spot gold was down 1 percent at $1,498.35 per ounce, while U.S. gold futures fell 0.97 percent to $1,508.7.  As such, the VanEck Vectors Gold Miners ETF (GDX) fell 1.24 percent on the day, bringing its year-to-date gains down to more than 32 percent, outperformed 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 GDX.

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 – VanEck Vectors Gold Miners ETF (weekly)

Our “U.S. Market Trading Map” painted GDX bars in red (sell) – see area ‘A’ in the chart.  GDX has been on a tear in recent weeks after the late March correction found support near the late 2018 breakout point.  The late May rally found resistance near the prior high set in August 2016.  Monday’s selloff pushed the ETF below support near the 28 zone, signify a bearish breakout and downside reversal.  This is a negative development, increased the probability for a test of support near the 26.50 zone.  A close below that level has measured move to around 24.30.

GDX has resistance near 30.  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 bullish (buy).  Last changed August 19, 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, S&P is heading toward the trend channel moving average after recent pullback to support at the lower boundary of the green band was met with a new wave of buying interest. Money Flow measured trended higher from above the zero line, indicating an increase in buying pressure.  Momentum indicator shifted higher from near oversold zone, allowing additional upside probing.  These elements increased the probability for a retest of resistance at the trend channel moving average, currently at 29455.  This level is significant in charting terms.  It was tested several times over the past weeks.  A close above that level will complete the bullish W-shape bottom and trigger acceleration toward the prior high set in late July.

For now, the trend channel moving average, currently at 2945, 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 2750.

Short-term trading range: 2885 to 2945.  S&P has support near 2908.  A close below that level has measured move to 2885.  The index has resistance near 2945.  A close above that level has measured move to 3028.

Long-term trading range: 2450 to 3200.  S&P has support near 2800.  A close below that level has measured move to 2450.  The index has resistance near 3080.  A close above that level has measured move to 3200.

In summary, S&P tested and held support at the green band, or oversold zone.  Our near-term work on price structure and momentum suggested that the index is in a reflexive bounce.  Traders will be looking for the index to close above the trend channel moving average before getting aggressively long again.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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