Market Internal Deteriorated as S&P Fell Below 3000 But Downside Risk Could be Limited

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Tuesday September 17, 2019.

Stocks fell on Monday amid fears that a surge in oil prices following an attack in Saudi Arabia could slow down global economic growth.  For the day, the Dow Jones Industrial Average slid 0.5 percent to 27,076.82. The S&P pulled back 0.3 percent to 2,997.96. The Nasdaq Composite also dipped 0.3 percent to 8,153.54.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, jumped nearly 7 percent to 14.67.

Oil-sensitive stocks attracted strong buying support Monday as WTI crude posted a biggest one-day gain, surged more than 14 percent, since 2008.  Devon Energy skyrocketed more than 12 percent while Marathon Oil jumped 11.6 percent.  As such, the Energy Select Sector SPDR Fund (XLE) had its best day of the year, jumping 3.41 percent, bringing its year-to-date gains up to more than 10 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 Fund (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 July selloff found support near the prior low set in late 2018.  This week’s rally pushed the ETF up against the 1-year moving average, a key technical level based on moving averages. That level was significant when the ETF fell below it in late 2018. Over the next few days, traders should monitor trading behavior as the 63.50 zone is probed.  A close above that level will trigger acceleration toward the more important resistance near the 68 zone.

XLE has support just below 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 fell below the lower boundary of the pink band after climbed above that level last week.  That level roughly corresponds with the important sentiment 3000 mark.  Market internal deteriorated following recent selloff but downside momentum does not appeared strong enough to generate widespread breakdown.  Right now follow-through is the key.  A close below 2985 will trigger a large scale selloff with downside target near 2968-2950.

Short-term trading range: 2950 to 3068.  S&P has support near 2968.  A close below that level has measured move to 2950.  The index has resistance near 3000.  A close above that level has measured move to 3020-3030.

Long-term trading range: 2920 to 3100.  S&P has support near 2920.  A close below that level has measured move to 2820.  The index has resistance near 3011.  A close above that level has measured move to 3100.

In summary, market internal deteriorated as S&P fell below the important sentiment 3000 mark.  While seemingly vulnerable to further short-term weakness, downside momentum does not appeared strong enough to generate widespread breakdown.  This could help putting a short-term floor under the market.

 

Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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