Buying Pressure Deteriorated As S&P Tested Key Level

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Monday October 21, 2019.

Stocks closed lower Friday, weighed down by steep losses in Boeing, Johnson & Johnson and Netflix.  For the day, the Dow Jones Industrial Average fell 0.95 percent to 26,770.20.  The S&P 500 pulled back 0.4 percent to 2,986.20 while the Nasdaq Composite slid 0.8 percent to 8,089.54.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, rose more than 3 percent to 14.25.

The defensive-oriented real estate, utilities, and consumer staples sectors finished higher Friday as investors leaned cautiously following negative corporate headlines and tepid Chinese data.  As such, the iShares U.S. Real Estate ETF (IYR) rose 0.80 percent for the day, and is up more than 26 percent year-to-date, outperformed the S&P.  Now the question is whether the rally has more legs?  Below is an update look at a trade in IYR.

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 – iShares U.S. Real Estate ETF (weekly)

Our “U.S. Market Trading Map” painted IYR bars in green (buy) – see area ‘A’ in the chart. Over the past few weeks, IYR has been basing sideways near the prior high set in early September as it worked off overbought conditions.  Last week’s rally had helped pushed the ETF above the closely watch 94.20 zone.  This is a positive development, signify a bullish breakout with upside target near 100, or the 127.2% Fibonacci extension.

IYR has support near 93.  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”]

The big picture remains the same.  S&P continues basing sideways near the lower boundary of the pink band as support.  That level roughly corresponds with the important sentiment 3000 mark.  Money Flow measure is below the zero line, indicating a negative net demand for stocks.  The fact that buying pressure deteriorated as the S&P tested key price level suggested 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.  While more backing and filling would not be a surprise, a close below 2970 would see a massive pickup in volatility.  We’d turn particularly bearish if the index closes twice below that level.

Short-term trading range: 2944 to 3030.  S&P has support near 2970.  A close below that level has measured move to 2944.  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, the big picture remains the same. There is an orderly pullback consolidation, which represents digestion period.  However, the fact that buying pressure deteriorated as the S&P tested key price level suggested 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.  With this in mind we’d look to reduce exposure into intraday bounces.

 

Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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