S&P in Consolidation Phase Prior to New Upswing

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Monday September 9, 2019.

We’ve noted in the previous Market Outlook that: “S&P cleared key resistance, breaking out to multi-week high…Nonetheless, upside momentum does not appeared strong enough to generate widespread breakouts.  So it should not be surprising to see some backing and fillings prior to new upleg.”  As anticipated, stock market finished mixed on Friday, as it cooled off from a two-day rally amid a lackluster response to the August employment report. The S&P climbed just 0.1 percent to close at 2,978.71.  The Dow Jones Industrial Average added 0.3 percent to 26,797.46 while the Nasdaq Composite slipped 0.2 percent to 8,103.07.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, tumbled nearly 8 percent to 15.

Oil prices rose on Friday after Fed Chair Powell said the FED would “act as appropriate” to sustain an economic expansion that has been pressured by uncertainty over global trade. U.S. West Texas Intermediate (WTI) crude was up 22 cents to settle at $56.52.  As such, the Energy Select Sector SPDR ETF (XLE) rose 0.53 percent on the day, bringing its year-to-date gains to nearly 3 percent, underperformed the S&P.  Now the question is whether the rally has more legs?  Below is an update look at a trade in XLE.

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 – Energy Select Sector SPDR ETF (weekly)

Our “U.S. Market Trading Map” painted XLE bars in green (buy) – see area ‘A’ in the chart. Over the past few weeks, XLE has been trending lower after early June rally attempt ran into resistance near the 20-week moving average, a key technical level based on moving averages.  The mid-July downswing found support near the prior low set in late 2018.  Last week’s massive bullish engulfing bar signify a bullish breakout and upside reversal.  This is a positive development, opened up for a test of 61 level.

XLE has support near 55.  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”]

S&P continues basing sideways near the lower boundary of the red band, or extreme overbought zone. That level roughly corresponds with the important sentiment 3000 mark.  Momentum indicator whipsaws near overbought zone.  In fact, recent trading actions represented an orderly high-level consolidation period.  This is a bullish development, suggested that the path with least resistance is still significantly higher here.  Perhaps, the positive Money Flow measure is the best illustration of the bulls’ case.

Short-term trading range: 2946 to 3000.  S&P has support near 2946.  A close below that level has measured move to 2900.  The index has resistance near 2985-3000.  A close above that level has measured move to 3080.

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, several key technical indicators suggest that S&P is in a midst of a short-term consolidation phase.   The fact that the index managed to hold on to most of recent gains, indicating an internal strength.  This increases the probability that the S&P will break out from current trading range as soon as the market shakes off the excessive bullishness.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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