S&P Cleared 3100 but Follow-through is the Key

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Monday November 18, 2019.

Stocks surged Friday setting new closing and intraday highs after the White House said trade negotiations with China were progressing.  The Dow Jones Industrial Average rallied 0.7 percent to 28,004.89.   The S&P and Nasdaq Composite made new all-time highs as well, climbing 0.8 percent to 3,120.46 and 0.7 percent to 8,540.83, respectively.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, tumbled more than 7 percent to 12.05.

Health care stocks rose more than 2 percent after the Trump administration released a plan that would force hospitals and insurance companies to disclose the rates they negotiated. UnitedHealth, Humana and Danaher were all up more than 4 percent.  As such, the Health Care Select Sector SPDR ETF (XLV) jumped 2.13 percent on the day, and is up nearly 13 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 October massive rally pushed the ETF above the closely watch 96 zone, or the prior highs set in late 2018, signify a bullish breakout. Right now follow-through is the key.  A consecutive close above 96 on a weekly basis will confirm this and increase the probability for a rapid advance toward the next level of resistance near 107, or the 127.2% Fibonacci extension.

XLV has support near 94.  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”]

Key technical development in Friday session was a clear break above the important sentiment 3100 mark, the level that the S&P struggled to get past it throughout last week.  This is a positive development but let’s notice that the rally has created overbought conditions.  Momentum indicator is at the level that has been successfully in repelling price actions over the past months.  Nevertheless, Money Flow measure is above the zero line, indicating a positive net demand for stocks.  With this in mind, we’d look to reduce exposure into overbought strength, which might take the S&P closer to 3170 before a significant pullback unfolds.

Short-term trading range: 3100 to 3170.  S&P has support near 3100.  A failure to hold above that level has measured move to 3083.  The index has resistance near 3130.  A breakout above that level has measured move to 3170.

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 cleared key technical resistance, breaking out from the one-week congestion trading pattern.  The breakout would be confirmed on a consecutive close above 3100, which would support near-term upside follow-through and a test of more important resistance in the 3170 area.

 

Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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