S&P Leading Indicator Points Toward Fading Trend

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Wednesday November 13, 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 rally.”  As anticipated, stocks ended basically flat Tuesday as Donald Trump’s speech did not offer clues on when a China-U.S. trade deal will be signed.  The S&P added 0.2 percent to 3,091.84. The Nasdaq Composite advanced 0.3 percent to 8,486.09. The Dow Jones Industrial Average, meanwhile, closed completely unchanged at 27,691.49.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell 0.1 percent to 12.68.

Most S&P sectors finished in positive territory, with healthcare gaining the most.  As such, the Health Care Select Sector SPDR ETF (XLV) rose 0.60 percent on the day, and is up more than 10 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 early November massive rally pushed the ETF up against the closely watch 96 zone, of the prior high set in late 2018.  Recent trading actions leaving the ETF in what looks to us like an orderly high level consolidation.  This is a positive development, suggesting that XLV will take a leg higher as soon as it works off overbought conditions.  A close above 96 on a weekly basis will confirm this and trigger acceleration toward the 100 zone, 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”]

The big picture remains the same.  The S&P continues drifting higher near the lower boundary of the red band, or extreme overbought zone.  Traders however, should notice that the October rally has created overbought conditions. Adding to concerns is the lagging Money Flow measure.  The indicator registered a lower high as prices ascending, suggesting that buying enthusiasm faded as the index inches toward all-time high.  This negative development does not favor a sustain break to the upside.  With this in mind we’d consider taking down exposure into overbought strength.

For now, 3087 represents key support.  A close below that level will trigger selloff with initial downside target near 3067-3040. The lower boundary of the red band, near 3100, represents key price level.  A close above that level could trigger acceleration toward 3145.

Short-term trading range: 3067 to 3105.  S&P has support near 3087.  A failure to hold above that level has measured move to 3067-3040.  The index has resistance near 3100-3109.  A breakout above that level has measured move to 3145.

Long-term trading range: 3000 to 3220.  S&P has support near 3000.  A failure to hold above that level has measured move to 2870.  The index has resistance near 3200.  A close above that level has measured move to 3340.

In summary, while the market could continue to drift higher as trading sentiment remains strong, several leading indicators are pointing toward a fading trend.  As for strategy, traders should consider taking partial profits or at least buying downside protections on winning positions.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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