S&P Constrained by Short-term Sideways Trend

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Thursday September 19, 2019.

We’ve noted in the previous Market Outlook that: “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.”  As anticipated, stocks closed mixed on Wednesday, as investors digested the second rate cut from the Fed this year and an earnings warning from FedEx (FDX).  The S&P ended the day just above the flatline at 3,006.73. The Dow Jones Industrial Average rose 0.1 percent to 27,147.08. The Nasdaq Composite fell 0.1 percent to 8,177.39.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell more than 3 percent to 13.95.

Equities sold off sharply and volatility quickly ensued after the Federal Reserve failed to signal it will cut rates again in 2019.  Selling pressure, however, abated and stocks climbed to session highs as the Fed Chair Powell wrapped up his press conference. The utilities sector outperformed, while the energy sector underperformed.  As such, the Utilities Select Sector SPDR ETF (XLU) rose 0.42 percent for the day, bringing its year-to-date gains up to nearly 21 percent, outperformed the S&P.  Now the question is whether the rally has more legs?  Below is an update look at a trade in XLU.

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 – Utilities Select Sector SPDR ETF (weekly)

Our “U.S. Market Trading Map” painted XLU bars in green (buy) – see area ‘A’ in the chart. Over the past few weeks, XLU has been trending higher after breakout from the 2-month congestion trading pattern in August.  This week’s rally pushed the ETF up against the 127.2% Fibonacci extension. That level was tested several times over the past weeks.  Technically speaking, the more often the resistance is tested the weaker it becomes.  Over the next few days, traders should monitor trading behavior near the 64.50 zone.  A close above that level will trigger acceleration toward the 161.8% Fibonacci extension, just above 68.

XLU has support near 62.  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”]

The S&P continues basing sideway near the important sentiment 3000 mark after the early selloff attempt was met with a new wave of buying interest. Market internal remains bullish but the return of overbought conditions on an intraday basis will continue negatively affect trading sentiment in the coming days. For now, 2980 is the line in the sand.  A close below that level will trigger a new selloff with initial downside target near 2950.

Short-term trading range: 2950 to 3068.  S&P has support near 2980.  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, trading behavior in the S&P remains constrained by a short-term sideways pattern and shown little evidence of a sustainable change in trend.  2980 is the line in the sand.  A failure to hold above that level would trigger a new sell signal and an unwelcome pickup in downside volatility.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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