S&P In Holding Pattern

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Thursday August 22, 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 last week’s massive rally.  The overall technical backdrop remains positive, suggesting that selloff will likely be shallow and quick because sideline money will try to fight its way back into the market.  As for strategy, traders should consider buying into market dips.”  As anticipated, stocks closed higher Wednesday as strong quarterly results from retailers such as Target and Lowe’s lifted investor sentiment.  The S&P gained 0.8 percent to close at 2,924.43. The Dow Jones Industrial Average added 0.9 percent to 26,202.73. The Nasdaq Composite also rose 0.9 percent to 8,020.21.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, tumbled nearly 10 percent to 15.84.

Upbeat results and reassuring guidance from Target (TGT) and Lowe’s (LOW) reinforced the notion that the U.S. consumer remains in good shape.  As such, the SPDR S&P Retail ETF (XRT) jumped 1.88 percent on the day, but is down nearly 4 percent year-to-date, underperformed the S&P.  Now the question is whether the rally has more legs?  Below is an update look at a trade in XRT.

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 Retail ETF (weekly)

Our “U.S. Market Trading Map” painted XRT bars in red (sell) – see area ‘A’ in the chart. XRT has been trending sharply lower over the past few weeks after the early June rally ran into resistance near the late May breakdown point.  The early August downswing tested formidable support near the 38 zone. That level was tested several times over the past years.  This week’s rally suggested that the support would hold, at least for the time being.  However, given the damages down over the past months, we want to see XRT hurdle and sustain above 40.45 to say with confident that a short-term low is in.

XRT has support near 38.  A close below that level has measured move to around 34.  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 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”]

S&P continues basing sideways near the trend channel moving average.  That level was significant when the index fell below it in early August. It’s now acting as strong resistance.  Market internal has been strengthened, suggesting that the index could take a leg higher as soon as it works off excessive optimism.

The trend channel moving average, currently at 2946, is the line in the sand.  The bulls must hurdle and sustain above that level to maintain upside momentum.  As mentioned, a close above that level will complete the bullish W-shape bottom and trigger acceleration toward the prior high set in late July.  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: 2896 to 2946.  S&P has support near 2910-2896.  A close below that level has measured move to 2800.  The index has resistance near 2946.  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, market is in holding pattern as traders are watching to see whether or not the S&P can hold above 2900.  Market internal has been strengthened, suggesting that the index could take a leg higher as soon as it works off excessive optimism.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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