Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Friday October 18, 2019.
We’ve noted in the previous Market Outlook that: “Momentum…remains favorable over the short to intermediate term…Wednesday’s weakness is merely a pause that refreshes rather than a beginning of a new downswing.” As anticipated, stocks rose on Thursday after strong earnings results from companies such as Netflix and Morgan Stanley. The Dow Jones Industrial Average climbed 0.1 percent to 27,025.88. The S&P gained 0.3 percent to 2,997.95 while the Nasdaq Composite advanced 0.4 percent to 8,156.85. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, rose more than 1 percent to 13.68.
The health care space presumably outperformed on optimism that a $50 billion package offered by five companies could settle the opioid lawsuits. Companies involved include Johnson & Johnson (JNJ), Teva Pharma (TEVA), McKesson (MCK), Cardinal Health (CAH), and AmerisourceBergen (ABC). As such, the Health Care Select Sector SPDR ETF (XLV) rose 0.74 percent for the day, and is up more than 6 percent year-to-date, 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 late September downswing found support near the 2-year moving average, a key technical level based on moving averages. This week’s rally pushed the ETF above the July falling trend line, signify a bullish breakout and upside reversal. This is a positive development, opened up for a test of the 2018 high, near 96. A close above that level will increase the probability for a rapid advance toward 106, or the 127.2% Fibonacci extension.
XLV has support near 88. 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 continues drifting higher using the lower boundary of the pink band as support. Money Flow measure whipsaws near the zero line as the index struggled to get pass the important sentiment 3000 mark. This is a short-term negative development. Nevertheless, momentum remains favorable over the short to intermediate term. This could help putting a short-term floor under the market.
Right now, the most important thing to watch is trading behavior as the 3000 zone is tested. As mentioned, the S&P is now at a key juncture. It is testing formidable resistance from below. A failure to climb above key level suggests that most of the potential buyers at this level had already placed their bets. The next batch of buyers typically sits at a much lower level.
Short-term trading range: 2957 to 3030. S&P has support near 2984. A close below that level has measured move to 2957. The index has resistance near 3000. A close above that level has measured move to 3020-3030.
Long-term trading range: 2840 to 3130. S&P has support near 2840. A close below that level has measured move to 2700. The index has resistance near 3070. A close above that level has measured move to 3130.
In summary, S&P struggled to get pass the important sentiment 3000 mark but momentum remains supportive so downside risk could be limited. It is possible that S&P could continue to drift higher as trading sentiment remains strong. As for strategy, traders should look to buy into market dips rather than chasing breakouts.
Thanks and happy trading.
(By：Michelle Mai for Capital Essence)
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