S&P in Short-term Reflexive Bounce

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 October 4, 2019.

We’ve noted in the previous Market Outlook that: “Wednesday’s downside follow-through confirmed Tuesday’s bearish signal.  While seemingly vulnerable to further short-term weakness, support is strong near 2830. That level is too big and too important to fall quickly.  It could help minimize downside follow-through and widespread breakdowns.”  As anticipated, stocks briefly added to those losses on Thursday after ISM’s reading on the U.S. services sector fell last month to its lowest level since August 2016. The S&P dropped more than 1% at its lows before buyers stepped in and pushed prices higher.

For the day, the bench mark gauge climbed 0.8 percent to 2,910.63. The Nasdaq Composite advanced 1.12 percent to 7,872.26. The Dow Jones Industrial Average gained 0.47 percent to 26,201.04. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell 7 percent to 19.12.

Bank stocks underperformed Thursday as the yield on the 2-year note has fallen to its lowest level since Sept. 2017 as expectations for more Fed rate cuts increase. According to the CME FedWatch Tool, the probability for a 25-basis points cut at the October FOMC meeting is about 90%, and a further quarter-point cut in December is over 50%. Both are up considerably from last week. As such, the Financial Select Sector SPDR ETF (XLF) added 0.4 percent for the day, and is up more than 13 percent year-to-date, slightly underperformed the S&P.  Now the question is whether the selloff is a pause that refreshes or it’s a beginning of something worse?  Below is an update look at a trade in XLF.

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 – Financial Select Sector SPDR ETF (weekly)

Our “U.S. Market Trading Map” painted XLF bars in red (sell) – see area ‘A’ in the chart. Over the past few weeks, XLF has been trending lower in a short-term corrective mode after the late August rally ran into resistance near upper boundary of the short-term rising trend channel that has been in place since early 2019.  This week’s selloff is testing the massive 2-conjoining support around the 26 zone, or the 2-year moving average and the lower boundary of the short-term rising trend channel.  That level is significant in charting terms.  A close below it signify bearish trend reversal and a test of the more important support near the 24 zone should be expected.

XLF has resistance near 29.  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 bearish (sell).  Last changed September 20, 2019 from bullish (buy) – (see area ‘A’ in the chart).

[Note: for more details analysis, please take a look at our “US Market ETF Trading Map”]

As expected, the S&P rebounded nicely off support at the lower boundary of the green band.  That level was tested several times over the past months.  This is a short-term positive development.  Momentum indicator shifted higher from near oversold zone, allowing additional upside probing.  Money Flow measure trended higher from below the zero line, indicating selling pressure had eased.

Over the next few days, trader should monitor trading behavior as the trend channel moving average is tested as resistance.  Some aggressive traders might use this level like a magnet to sell.  With that said, unless there is a close above 2943, the path with least resistance remains to the downside.

Short-term trading range: 2837 to 2943.  S&P has minor support near 2865.  A close below that level has measured move to 2837-2800.  The index has resistance near 2925.  A close above that level has measured move to 2943.

Long-term trading range: 2820 to 3100.  S&P has support near 2833.  A close below that level has measured move to 2490.  The index has resistance near 3050.  A close above that level has measured move to 3185.

In summary, S&P rebounded nicely after recent pullback found support near the lower boundary of the green band.  Our near-term work on price structure and momentum suggested that the index is in a short-term reflexive bounce.  Nevertheless, traders will be looking for the index to close above 2943 before getting aggressively long again.


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.