S&P Short-term Correction Could Be In The Wings

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Tuesday November 5, 2019.

The stock-market party rolled on Monday with the Dow joining the S&P and NASDAQ in hitting record highs as investor sentiment was lifted by strong earnings, a rebound in economic data and a potential U.S.-China trade deal.  For the day, the Dow Jones Industrial Average rose 0.4 percent to 27,462.11.  The S&P climbed 0.37 percent to 3,078.27. The NASDAQ advanced 0.56 percent to 8,433.20. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, jumped more than 4 percent to 12.83.

Sentiment around global trade was lifted after U.S. Commerce Secretary Wilbur Ross said Sunday that American firms would be granted licenses to sell to Chinese telecom giant Huawei “very shortly.”  Trade bellwethers Boeing and Caterpillar also rose more than 1 percent each.  As such, the Industrial Select Sector SPDR ETF (XLI) rose 1.16 percent on the day, and is up 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 XLI.

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 – Industrial Select Sector SPDR ETF (weekly)

Our “U.S. Market Trading Map” painted XLI bars in green (buy) – see area ‘A’ in the chart. XLI has been on a tear in recent weeks after the mid-September correction found support near the 1-year moving average, a key technical level based on moving averages.  This week’s rally had helped push the ETF above the closely watch 81 zone, or the prior high set in early 2018.  Right now follow-through is the key. A close above 81 on a weekly basis will confirm this and trigger a rapid advance toward the next level of resistance near 90, or the 127.2% Fibonacci extension.

XLI has support near 77.  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”]

S&P climbed above the lower boundary of the red band after recent pullback found support near 3025, or the prior high of hit on July 26.  This is bullish but let’s notice that with Monday’s gains, the index had poked its head into the extreme overbought zone, as represents by the red band in the chart.  Technically speaking, a close above the lower boundary of the red band indicates extreme overbought conditions, a situation that often precursor to a short-term pullback consolidation.

Money Flow measure however, still above the zero line, indicating a positive net demand for stocks.  This could help putting a short-term floor under the market.  With this in mind, we’d look to increase upside exposure into any pullback toward the 3050-3025 zone.

Short-term trading range: 3000 to 3054.  S&P has support near 3053.  A close below that level has measured move to 3025.  The index has resistance near 3090.  A close above that level has measured move to 3137.

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, S&P broke above the lower boundary of the red band Monday, signified extreme overbought conditions. This is a short-term negative development, suggesting that a short-term correction could be in the wings.  Nevertheless, with Money Flow measure above the zero line the path with least resistance remains higher.  With this in mind, we’d look to increase upside exposure into short-term market dips.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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