S&P in Consolidation Phase But Downside Could be Limited

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Tuesday October 8, 2019.

Stocks fell slightly on Monday as investors looked ahead to U.S.-China trade talks, which are set to begin later this week.  The Dow Jones Industrial Average fell 0.4 percent to 26,478.02. The S&P 500 dipped 0.5 percent to 2,938.79 while the Nasdaq Composite lost 0.3 percent to 7,956.29.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, rose nearly 5 percent to 17.86.

Trade sensitive groups traded lower Monday following a Bloomberg report that suggested China was not interested in a complete trade deal at this time.  As such, the Materials Select Sector SPDR ETF (XLB) fell 0.36 percent for the day, but is up more than 11 percent year-to-date, slightly underperformed the S&P.  Now the question is whether recent weakness is a pause that refreshes or it’s a beginning of something worse?  Below is an update look at a trade in XLB.

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 – Materials Select Sector SPDR ETF (weekly)

Our “U.S. Market Trading Map” painted XLB bars in red (sell) – see area ‘A’ in the chart. Over the past few weeks, XLB has been trending lower in a short-term corrective mode after the late August rally ran into resistance near the prior high set in late July.  The September correction is testing support at the 1-year moving average, a key technical level based on moving averages. Over the next few days, it’d be important to monitor trading behavior near the 55.50 zone.  A close below that level would bring the 53.50 zone into view.

XLB has resistance just above 59.  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 October 4, 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 down to test support at the trend channel moving average after climbed above that level last week.  The late day selloff pushed the index below the closely watch 2940 mark.  Money Flow measure fell below the zero line, indicating an increase in selling pressure.  Nevertheless, the near-term technical outlook remains bullish.  This could help putting a short-term floor under the market.

Short-term trading range: 2925 to 2974.  S&P has minor support near 2925.  A close below that level has measured move to 2843.  The index has resistance near 2956.  A close above that level has measured move to 2974.

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, Monday selloff attempt interrupted last week’s recovery rally in the S&P.  Although seemingly vulnerable to further short-term weakness, the overall technical backdrop remains positive so sell-off could be shallow because the sideline money will try to fight its way back into the market.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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