S&P Bearish Shooting Star Pattern Signals Potential Trend Reversal

Editor’s note: this column was originally published on Capital Essence’s CEM News. It’s being republished as a bonus for the loyal readers. For more information about subscribing to CEM News, please click here.

 

Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Friday September 20, 2019.

We’ve noted in the previous Market Outlook that: “trading behavior in the S&P remains constrained by a short-term sideways pattern and shown little evidence of a sustainable change in trend.”  As anticipated, the S&P closed unchanged on Thursday in a light volume session. The Dow Jones Industrial Average fell 0.2 percent to 27,094.79. The Nasdaq Composite gained less than 0.1 percent to 8,182.88.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, rose less than 1 percent to 14.05.

Equity market performed poorly Thursday even as economic data came in mostly better than expected. The initial weekly claims, Philadelphia Fed Index, and Existing Home Sales upheld the market’s improved outlook for U.S. economic growth.  The industrials, financials and energy sectors, which were among this month’s leaders, were session’s laggards. While utilities and health care sector outperformed. As such, the Health Care Select Sector SPDR ETF (XLV) rose 0.42 percent for the day, bringing its year-to-date gains up to more than 6 percent, underperformed the S&P.  Now the question is whether the rally has more legs?  Below is an update look at a trade in XLV.

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 – Health Care Select Sector SPDR ETF (weekly)

Our “U.S. Market Trading Map” painted XLV bars in green (buy) – see area ‘A’ in the chart. Over the past few weeks, XLV has been trending higher after the early July correction found support near the 2-year moving average, a key technical level based on moving averages.  This week’s upside follow-through confirmed the early September breakout above the July falling trend line, signify an upside reversal.  This is a positive development, increased the probability for a rapid advance toward the next level of resistance at the 2018 high, just above 96.

XLV has support near 90.  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 moved up to test the closely watch 3020-3030 zone, or the bulls market high set in late July.  That level was tested in early September.  The index briefly broke above the early September and reached an intraday high or 3021.99 before sellers stepped in and pushed prices lower.  In accordance to the Japanese candlestick pattern recognition, Thursday’s bearish topping tail, or shooting star candlestick, is a clear indication of supply overwhelming demand.  Technically speaking, this trading pattern exhibits characteristics of a distribution phase, the period in which smart money sell (distribute) their positions.  While more backing and filling would not be a surprise, a close below 2990 would see a pickup in near-term volatility.

Short-term trading range: 2950 to 3068.  S&P has support near 2990.  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, Thursday’s bearish shooting star candlestick together with the fact that the S&P is overbought as it test key overhead resistance suggesting that a short-term pullback consolidation is inevitable.  There’s a high probability that the late-day selloff will momentum but an undercut below the 2990 is needed before there is any real prospect of a change in the medium-term uptrend pressure.

 

Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

© All rights reserved and actively enforced.
Note: This is a free edition of The Market Outlook, a daily CEM News subscriber newsletter. To get this column before market opens together with hundreds of technical trading ideas (including stocks and ETFs) every month, please click here.
Subscribe to CEM News to receive more in-depth research from Capital Essence.