S&P 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 Monday October 14, 2019.

Stocks rallied on Friday following report that China and the U.S. reached the first phase of a substantial trade deal that delays tariff hikes that were set to kick in next week. The S&P stopped short of hitting a fresh high, surrendering 20 points just before the close after Donald Trump later said that a “very substantial phase 1 deal” has been reached.  For the day, the bench mark gauge rose 1.1 percent to 2,970.27, while the Nasdaq Composite jumped 1.3 percent to 8,057.04.  The Dow Jones Industrial Average added 1.2 percent to 26,816.59.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell more than 11 percent to 15.58.

U.S. dollar took a leg lower shortly after the Federal Reserve confirmed what starting Tuesday, the FED will begin purchasing Treasury bills at a pace of $60 billion per month. The purchases will continue into the second quarter of next year or longer. In addition to these purchases, the FED will continue conducting regular overnight and term repurchase operations through at least January.  As such, the Invesco DB US Dollar Index Bullish Fund (UUP) fell 0.37 percent for the day, and is up just a little more than 5 percent year-to-date.  Now the question is whether recent pullback is a pause that refreshes or it’s a beginning of something worse?  Below is an update look at a trade in UUP.

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 – Invesco DB US Dollar Index Bullish Fund (weekly)

Our “U.S. Market Trading Map” painted UUP bars in red (sell) – see area ‘A’ in the chart. Over the past few weeks, UUP has been trending lower in a short-term corrective mode after the late June rally ran out of steam just above 27.  Last week’s selloff pushed the ETF below the June rising trend line, signify a bearish breakout and downside reversal.  This is a negative development, increased the probability for a test of support near the 26.50 zone.  Below it, a more significant support lies just above 26.

UUP has resistance just above 27.  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 10, 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 bull marked high set in September after breaking above the trend channel moving average.  The index traded as high as 2993, about 7 points to the important sentiment 3000 mark, before sellers stepped in and pushed prices off the intraday high.  Technically speaking, the S&P is now at a key juncture.  It is testing formidable resistance from below.

In accordance to the Japanese candlestick pattern recognition, Friday’s bearish topping tail, or shooting star candlestick, is a clear indication of supply overwhelming demand.  Perhaps a lagging Money Flow measure is the best illustration of the bears’ case.  The indicator hovers near the zero line as the prices climbed higher, indicating a lack of commitment. Technically speaking, this trading pattern exhibits characteristics of a distribution phase, the period in which smart money sell (distribute) their positions.  With this in mind, we’d look to reduce exposure into short-term market bounces.

Short-term trading range: 2935 to 3000.  S&P has support near 2960.  A close below that level has measured move to 2935.  The index has resistance near 3000.  A close above that level has measured move to 3020-3030.

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, Friday’s bearish shooting star candlestick together with the lagging Money Flow measure suggested 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 S&P’s 2935 is needed before there is any real prospect of a change in the short-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.