S&P Overbought But Overall Technical Backdrop Remains Positive

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Thursday November 7, 2019.

We’ve noted in the previous Market Outlook that: “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.”  As anticipated, the S&P traded lower Wednesday as a report that the U.S.-China deal could be delayed until December increased worries about how long the trade war will go on. The market however, managed to overcome the early weakness and close near the unchanged mark.  For the day, the bench mark gauge, gave up 0.01 percent to 3,074.41.  The NASDAQ dropped 28 0.34 percent to 8,406.39.  The Dow Jones Industrial Average fell 0.01 percent to 27,489.72.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, was up more than 2 percent to 13.10.

Health care stocks attracted strong buying support Wednesday.  Humana Inc. (HUM) rose 3.9 percent as the health insurer reported quarterly profit that beat estimates on higher sales of its government-backed Medicare Advantage health plans.  CVS Health Corp (CVS) gained 4.9 percent after the pharmacy chain posted a better-than-expected quarterly profit, boosted by its Aetna (AET) health insurance business and pharmacy benefit management unit.  As such, the Health Care Select Sector SPDR ETF (XLV) rose 0.3 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. XLV has been on a tear in recent weeks after the July correction found support near the 2-year moving average, a key technical level based on moving averages.  The October rally is testing resistance at the 96 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 106, or the 127.2% Fibonacci extension.

XLV has support near 92.  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 the 3060 zone after recent rally ran out of steam near the lower boundary of the red band.  As mentioned, a trade above that level indicated extreme overbought conditions – a situation that often precursor to a meaningful correction.  While seemingly vulnerable to some short-term setback, the overall technical backdrop remains positive.  This certainly would argue that the path with least resistance is to the upside.  With this in mind, we’d look to increase upside exposure into any pullback toward the 3067-3040 zone.

Short-term trading range: 3040 to 3054.  S&P has support near 3067.  A failure to hold above that level has measured move to 3040.  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, based upon recent trading action, the S&P is in a short-term overbought condition.  Although seemingly vulnerable to some short-term setback, the overall technical backdrop remains positive.  Expect the index to draw in buyers in any pullback toward the 3067-3040 zone.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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