S&P in Overbought Consolidation but Pullback Could be Shallow and Quick

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Friday November 22, 2019.

We’ve noted in the previous Market Outlook that: “our near-term work on price pattern and momentum suggested strongly that the S&P is in a midst short-term pullback correction phase that could last about 5 to 10 trading sessions.  While the near-term technical bias is skewed toward further weakness, the bulls should not get into any serious trouble as long as the market holds above 3075. As for strategy, pullback will present a buying opportunity, while selling into strength may not be the best strategy in a market considered likely to bounce back.”  As anticipated, stocks closed lower but off intraday low Thursday amid ongoing worries about the uncertainty surrounding the U.S.-China trade negotiations.  For the day, the S&P pulled back 0.16 percent to 3,103.54. The Nasdaq Composite dropped 0.2 percent to 8,506.21.  The Dow Jones Industrial Average fell 0.2 percent to 27,766.29.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, rose more than 2 percent to 13.16.

Homebuilders were under selling pressure despite the bullish existing home sales report. The National Association of Realtors said lower mortgage rates and tight supplies sales up by their highest rate in two years.  The SPDR S&P Homebuilders ETF (XHB) fell 0.66 percent on the day, but is up more than 38 percent year-to-date, outperformed 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 XHB.

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 – SPDR S&P Homebuilders ETF (weekly)

Our “U.S. Market Trading Map” painted XHB bars in red (sell) – see area ‘A’ in the chart.  Over the past few weeks, XHB has been basing sideways after the August rally ran out of steam just below the prior high set in early 2018.  This week’s selloff signify a bearish reversal.  Right now the most important thing to watch is trading behavior near the 44.70 zone.  A close below that level on a weekly basis will confirm the bearish signal and trigger downside follow-through toward the 43 zone.

XHB has resistance near 47.  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 bearish (sell).  Last changed November 20, 2019 from bullish (buy) – (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 retreated after recent rally ran out of steam near the lower boundary of the red band, a key technical level.  Momentum indicator shifted lower from near overbought zone, suggesting further short-term weakness likely.  Money Flow measure however still holds above the zero line, indicating a positive net demand for stocks.  This could help putting a short-term floor under the market.

Over the next few days, traders should monitor trading behaviors near 3100.  A failure to hold above that level will trigger downside follow-through and a test of the more important support near the 3080 zone should be expected.

Short-term trading range: 3080 to 3115.  S&P has support near 3100.  A failure to hold above that level has measured move to 3080.  The index has resistance near 3115.  A breakout above that level has measured move to 3140.

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, an overbought pullback consolidation interrupted the October rally in the S&P.  Although seemingly vulnerable to further short-term weakness, the overall technical backdrop remains positive so sell-off could be shallow because the sideline money will try to fight its way back into the market.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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