Buying Into Short-term Market Dips Remains The Most Profitable Strategy

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Wednesday September 11, 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 bullish breakout.  The index is holding firmly above the trend channel moving average, a level it has not breached since market broke down in late July.  This is a positive development, increased the probability that the S&P will break out to new highs as soon as the market shakes off excessive bullishness.”  As anticipated, stock ended the day little changed on Tuesday.  The S&P closed just above the flatline at 2,979.39. The Nasdaq Composite closed marginally lower at 8,084.16. The Dow Jones Industrial Average outperformed, rising 0.3 percent to 26,909.43.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, rose more than 1 percent to 15.20.

Tuesday’s action saw investors continuing to rotate out of this year’s best-performing stocks for those perceived as having more potential value.  Improved sentiment pertaining to growth and trade has contributed to this value trade, which was made most pronounced in the outperformance in the energy sector.  The Energy Select Sector SPDR ETF (XLE) rose 1.18 percent on the day, bringing its year-to-date gains up to 6.2 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 higher after the mid-July selloff found support near the prior low set in late 2018.  This week’s upside follow-through confirmed last week’s bullish reversal signal.  This is a positive development, increased the probability for a rapid advance toward the 63-68 zone.  A close above 61.50 on a weekly basis will confirm this.

XLE has support near 60.  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”]

As expected, S&P moved down to test support at the trend channel moving average after recent rally ran out of steam near the lower boundary of the red band, or extreme overbought zone. That level roughly corresponds with the important sentiment 3000 mark.  Money Flow measure is above the zero line, indicating a positive net demand for stocks.  The fact that buying pressure has been strengthened as the S&P tested key price level suggested the market will take another leg higher as soon as it works off excessive optimism.  While more backing and filling would not be a surprise, a close below 2948 would see a massive pickup in volatility.  We’d turn particularly bearish if the index closes twice below that level.

Short-term trading range: 2948 to 3000.  S&P has support near 2948.  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, the big picture remains the same. There is an orderly pullback consolidation, which represents digestion period. As for strategy, buying into short-term market dips remains the most profitable strategy.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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