S&P Tests Inflection Point

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Wednesday November 20, 2019.

We’ve noted in the previous Market Outlook that: “while overbought is putting a cap on the upside the overall technical backdrop remains supportive so downside risk could be limited. It is possible that S&P could continue to drift higher as trading sentiment remains strong.  As for strategy, traders should look to increase exposure into short-term market dips rather than chasing breakouts.”  As anticipated, S&P hit a new intraday high but missed a new record close as traders digested mixed signals on the U.S.-China trade front.  For the day, the bench mark gauge closed marginally lower at 3,120.18. The Dow Jones Industrial Average fell 0.3 percent to 27,934.02.  The Nasdaq Composite added 0.2 percent to 8,570.66.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, rose more than 3 percent to 12.86.

Home Depot shares slid 5.4 percent after disappointing same-store sales, a key metric for retailers, overshadowed better-than-expected earnings, causing declines in shares of consumer services space.   As such, the Consumer Discretionary Select Sector SPDR ETF (XLY) fell 1.10 percent on the day, but is up about 22 percent year-to-date, slightly underperformed the S&P.  Now the question is whether recent pullback is a pause that refreshes or it’s a beginning of something worse?  Below is an update look at a trade in XLY.

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 – Consumer Discretionary Select Sector SPDR ETF (weekly)

Our “U.S. Market Trading Map” painted XLY bars in red (sell) – see area ‘A’ in the chart.  Following the massive rally in early 2019, XLY has been coiled into a tight trading range as traders await new catalysts. This week’s selloff pushed the ETF down to the May rising trend line.  This level is significant in charting terms.  A sustain breakdown below it suggests that the 6-month massive triangle pattern has resolved itself into a new downswing with initial downside target just above 115.

XLY has resistance near 123.  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.  As mentioned, a trade above that level indicates an extreme overbought condition, a situation that often precursor to a meaningful correction.  Money Flow measure shifted lower from above the zero line, indicating buying pressure has eased. Momentum indicator is falling but it’s much closer to extreme overbought than oversold territories.  So it should not be surprise to see further consolidation as overbought conditions are absorbed.  S&P’s 3100 is the line in the sand.  A close below that level would see a pickup in near-term volatility.

Short-term trading range: 3095 to 3140.  S&P has support near 3110.  A failure to hold above that level has measured move to 3095-3070.  The index has resistance near 3140.  A breakout above that level has measured move to 3175.

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 traded in narrow trading range as we’re heading into the end of the month.  Technical pressures are building up as the market dances its way into an increasingly tight trading range. S&P’s 3100 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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