S&P’s Upside Gains to be Limited by Short-term Overbought Condition

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Wednesday September 18, 2019.

We’ve noted in the previous Market Outlook that: “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.”  As anticipated, stocks closed slightly higher Tuesday after whipsaw around the flat-line for most off the trading session.  For the day, the S&P climbed 0.3 percent to 3,005.69. The Nasdaq Composite advanced 0.4 percent to 8,186.02.  The Dow Jones Industrial Average rose 0.1 percent to 27,110.80.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell more than 1 percent to 14.44.

Nine of the 11 S&P sectors finished higher, led by the real estate.  The group attracted strong buying support following the bullish NAHB Housing Market Index for September, which increased to 68 from 67 in August (revised from 66).  As such, the SPDR S&P Homebuilders ETF (XHB) rose 0.21 percent for the day, bringing its year-to-date gains up to more than 33 percent, outperformed the S&P.  Now the question is whether the rally has more legs?  Below is an update look at a trade in XHB.

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 Homebuilders ETF (weekly)

Our “U.S. Market Trading Map” painted XHB bars in green (buy) – see area ‘A’ in the chart. Over the past few weeks, XHB has been trending higher after the July selloff found support near the 2-year moving average, a key technical level based on moving averages.  Last week’s rally pushed the ETF above the prior high set in July, signify a bullish breakout and upside reversal.  Over the next few days, traders should monitor trading behavior as the 42 zone is probed as support.  It’d be bullish if the ETF could hold above that level.  Resistance is near 44.  A close above that level will trigger acceleration toward the 2018 high, just above 47.

XHB has support near 42.  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, S&P climbed above the important sentiment 3000 mark after recent pullback was met with a new wave of buying interest. Money Flow measure trended higher from above the zero line, indicating an increase in buying pressure.  Momentum has been strengthened but the return of overbought conditions on an intraday basis might put a cap on the upside. So we’d be cautious against taking large position at this stage.

Short-term trading range: 2950 to 3068.  S&P has support near 2975.  A close below that level has measured move to 2950.  The index has resistance near 3020.  A close above that level has measured move to 3040-3060.

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 has been strengthened as S&P climbed up to test the 3000-3020 zone. Not only that this area is too big and too important to fall quickly, the return of overbought conditions on intraday basis will keep the lid of the upside.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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