S&P Trapped in Narrow Trading Range

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Friday November 15, 2019.

We’ve noted in the previous Market Outlook that: “although overbought condition is keeping buyers at bay, the important sentiment 3100 mark continues to act as price magnet.  Short-term traders can anticipate increase short-term volatility with rapid up and down moves in the market.”  As anticipated, the S&P traded lower in early Thursday session as disappointing guidance from Cisco Systems and a downgrade on Apple triggered a new round of profit taking.  The market however, managed to overcome the early weakness and closed higher.  For the day, the bench mark gauge closed just 0.1 percent higher at 3,096.63. The Dow Jones Industrial Average, however, closed marginally lower at 27,781.96 while the Nasdaq Composite dipped 0.04 percent to 8,479.02.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, rose less than 1 percent to 13.05.

Industrials, Basic Materials and Consumer Services sectors outperformed while Telecoms, Oil & Gas and Technology sectors finished lower.  As such, the Materials Select Sector SPDR ETF (XLB) rose 0.62 percent on the day, and is up nearly 20 percent year-to-date, slightly underperformed the S&P.  Now the question is whether the rally has more legs?  Below is an update look at a trade in XLB.

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 – Materials Select Sector SPDR ETF (weekly)

Our “U.S. Market Trading Map” painted XLB bars in green (buy) – see area ‘A’ in the chart.  XLB has been on a tear in recent weeks after the September correction found support near the 1-year moving average, a key technical level based on moving averages.  The early October massive rally pushed the ETF above the closely watch 59 zone, or the prior highs set in summer 2019, signify a bullish breakout.  This week’s upside follow-trough confirmed the bullish signal and opened up for a test of the more important resistance near the 64 zone, or the early 2018 high.

XLB has support near 59.  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.  There is a consolidation near the lower boundary of the red band. That level is significant in charting terms.  A trade above it often marked short-term market top.  Momentum remains positive but the indicator is much closer to overbought than oversold.  Money Flow measure trended higher from above the zero line, indicating a positive net demand for socks.  So it should not be surprise to see further consolidation as overbought conditions are absorbed.  3077 is the line in the sand.  A failure to hold above that level would see a pickup in near-term volatility.

Short-term trading range: 3077 to 3124.  S&P has support near 3077.  A failure to hold above that level has measured move to 3050.  The index has resistance near 3100.  A breakout above that level has measured move to 3124.

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, S&P is trapped within narrow trading range as traders are waiting for new catalyst to push stocks higher.  Technical pressures are building up as the market dances its way into an increasingly tight trading range. S&P’s 3077 marks the inflection point.  A failure to hold above key level indicates a change in sentiment and a much deeper pullback should be expected.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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