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 November 6, 2019.

We’ve noted in the previous Market Outlook that: “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.”  As anticipated, the S&P closed lower Tuesday, down 0.12 percent to 3,074.62.  The Nasdaq Composite added 0.02 percent to 8,434.68.  The Dow Jones Industrial Average rose 0.11percent to 27,492.63.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, was up more than 2 percent to 13.10.

Financials attracted some buying support Tuesday as benchmark U.S. Treasury yields hit a six-week high.  The 10-year Treasury note, which moves inversely to price, was higher at around 1.858 percent, while the yield on the 30-year Treasury bond was also higher at around 2.342 percent.  As such, the Financial Select Sector SPDR ETF (XLF) rose 0.37 percent on the day, and is up nearly 24 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 XLF.

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 – Financial Select Sector SPDR ETF (weekly)

Our “U.S. Market Trading Map” painted XLF bars in green (buy) – see area ‘A’ in the chart. XLF has been on a tear in recent weeks after the late September correction found support near the 2-year moving average, a key technical level based on moving averages.  This week’s rally had helped push the ETF above the upper boundary of the rising trend channel that has been in place since early 2019.  This is a positive development, opened up for a test of the more important resistance near the 30.30 zone, or the prior high set in 2018.  That level is significant in charting terms.  A close above it on a weekly basis signify a bullish breakout and trigger a rapid advance toward the next level of resistance near 34, or the 127.2% Fibonacci extension.

XLF has support near 28.  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 fell below the lower boundary of the red band after climbed above that level on Monday.  That level is significant in charting terms.  As shown, all brief rallies toward the red band was met with waves of aggressive selling interest that pushed the index down to the lower boundary of the pink band.  Momentum indicator shifted lower from near overbought zone, suggesting further short-term weakness likely. Money Flow measure however, still hovers 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 3060-3035 zone.

Short-term trading range: 3035 to 3054.  S&P has support near 3060.  A close below that level has measured move to 3035.  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, recent trading actions leaving the S&P in what looks to us like an orderly high level back-and-forth consolidation of the October massive rally.  There is a high probability that the upper and lower limit of a short-term trading range has been set between the 3035 and 3085 levels on the S&P.  Short-term traders can anticipate continued volatility with rapid up and down moves in the markets.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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