S&P In Overbought Consolidation

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Wednesday October 30, 2019.

We’ve noted in the previous Market Outlook that: “S&P broke key resistance Monday, suggesting that the multi-month sideways trading pattern had resolved itself into a new upswing.  However, given the overbought conditions and looming resistance near 3050 there is no big commitment to accumulate stocks aggressively at this point.  As for strategy, traders should look to reduce exposure into overbought strength.”  As anticipated, S&P hit a new intraday high of 3,047.96 early in the session but pulled back to a 0.08 percent loss.  The Dow Jones industrials dropped a modest 0.07 percent. The Nasdaq Composite slid 0.59 percent.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, climbed less than 1 percent to 13.21.

Health care stood out as the best-performing sector on Tuesday, lifted by Pfizer, Merck and HCA’s earnings beats.  Pfizer and Merck jumped 2.4 percent and 3.5 percent respectively on strong earnings.  As such, the Health Care Select Sector SPDR ETF (XLV) rose 1.42 percent on the day, and is up about 9 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 July correction found support near the 1-year moving average, a key technical level based on moving averages.  This week’s upside follow-through confirmed last week’s bullish breakout above the July falling trend line. This is a positive development, opened up for a test of the 2018 high, around 96.  That level is significant in charting terms.  A sustain advance above it will set the stage for a rapid advance toward the 107 zone, or the 127.2% Fibonacci extension.

XLV has support near 91.  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 23, 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”]

As expected, S&P moved down to test support at recent breakout point of 3025.86, or the record high of hit on July 26, after the early rally attempt ran out of steam near the lower boundary of the red band.  Market internal has been weakened but downside momentum does not appeared strong enough to generate widespread breakdowns.  For the near term, the market has carved out key short-term resistance and support levels for traders to monitor.  If S&P holds above 3025, then a breakout to new highs would be easier to be achieved.  A failure to hold above 3025 meanwhile, indicates 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 and we’re looking at 3000-2960.

Short-term trading range: 2990 to 3054.  S&P has support near 3022.  A close below that level has measured move to 3000.  The index has resistance near 3054.  A close above that level has measured move to 3100.

Long-term trading range: 2840 to 3220.  S&P has support near 2840.  A close below that level has measured move to 2700.  The index has resistance near 3080.  A close above that level has measured move to 3220.

In summary, our near-term work on price structure and momentum suggested that the S&P is in a midst of an overbought consolidation, which represents the digestion period in the aftermath of October’s massive rally.  Over the next few days, we will look for trading behaviors as the S&P probes key support near 3025.  A failure to hold above key support 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.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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