Trendless Consolidation Will Give Way To Major Breakout

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Thursday September 5, 2019.

Stocks closed higher Wednesday as tensions in Hong Kong between the government and protesters eased after the withdrawal of a controversial bill.  The Dow Jones Industrial Average rose 0.9 percent to 26,355.47. The S&P gained 1.1 percent to 2,937.78. The Nasdaq Composite advanced 1.3 percent to 7,976.88.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, tumbled nearly 12 percent to 17.33.

Bank stocks got a boost as the U.S. yield curve steepened, with the 10-year rate trading above its 2-year counterpart. Bank of America, J.P. Morgan Chase and Citigroup all gained more than 1 percent.  As such, the Financial Select Sector SPDR ETF (XLF) rose 0.98 percent on the day, bringing its year-to-date gains up to 13 percent, underperformed the S&P.  Now the question is whether the rally has more legs?  Below is an update look at a trade in XLF.

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 – Financial Select Sector SPDR ETF (weekly)

Our “U.S. Market Trading Map” painted XLF bars in green (buy) – see area ‘A’ in the chart. XLF is running into an intact recovery trend channel since reaching its interim lows in late 2018.  The early August pullback found support at the 3-year moving average, near 26.  That level represents a major price support.  It is no surprised that prices were correcting higher.  Over the next few days, traders should monitor trading behavior as the 27-27.50 zone is testing as resistance.  A close above that level on a weekly basis will trigger acceleration toward the upper boundary of the 8-month rising trend channel, around 29.

XLF has support near 26.  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 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”]

Once again, the S&P bounced off support at the important sentiment 2900 mark.  That level roughly corresponds with the upper boundary of the green band.  Wednesday’s rally pushed the index up against formidable resistance at the trend channel moving average.  That level represents a major price resistance.  It was tested several times over the past weeks.

Market internal has been strengthened, increases the probability for a breakout above 2944 and a rapid advance toward the lower boundary of the pink band, around 3000.

Short-term trading range: 2890 to 3000.  S&P has support near 2890.  A close below that level has measured move to 2820-2800.  The index has resistance near 2944.  A close above that level has measured move to 3000.

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, based upon recent trading action, the upper and lower limit of a short-term trading range has been set between the 2800 and 2944 levels on the S&P.  Over the next couple of days, we will look for the breakout and retreat behaviors as the 2944 level is retested and as the index probes the important sentiment 3000 level.  A failure breakout follows by a subsequence decline below 2900 suggests that most of the potential buyers at this level had already placed their bets and a much deeper pullback will most likely ensue.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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