Buy The Dips Remains The Most Profitable Strategy

Editor’s note: this column was originally published on Capital Essence’s CEM News. It’s being republished as a bonus for the loyal readers. For more information about subscribing to CEM News, please click here.

 

Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Monday November 25, 2019.

We’ve noted in the previous Market Outlook that: “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.”  As anticipated, stocks rose slightly on Friday, but posted their first weekly decline in over a month amid lingering worries around U.S.-China trade talks.  For the day, the S&P gained 0.2 percent to 3,110.29 while the Nasdaq Composite advanced 0.16 percent to 8,519.88.  The Dow Jones Industrial Average climbed 0.4 percent to 27,875.62.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell more than 6 percent to 12.34.

Banks were especially strong with US Bancorp (USB) hitting a 52-week high. Airlines were gainers as oil prices fell back.  As such, the SPDR S&P Bank ETF (KBE) rose 0.55 percent on the day, but is up about 23 percent year-to-date, outperformed the S&P.  Now the question is whether the rally has more legs?  Below is an update look at a trade in KBE.

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 Bank ETF (weekly)

Our “U.S. Market Trading Map” painted KBE bars in green (buy) – see area ‘A’ in the chart.  Over the past few weeks, KBE has been trending lower in a short-term corrective mode after the October rally ran out of steam near the late 2018 breakdown point.  The correction is testing support at the 2-year moving average.  That level was significant when the ETF climbed above it in early November.  It’s now acting as strong support.  If KBE could hold above that level then a retest of the late 2018 high would be easier to achieve.  Immediate resistance is around 47.  A sustain advance above that level could trigger acceleration toward 52, or the 2018 high.

KBE has support near 45.  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”]

S&P continues basing sideways, using the important sentiment 3100 mark as support.  Despite last week’s pullback, market remains overbought.  Although near-term technical bias is skewed toward short-term weaknesses, Money Flow measure is above the zero line, indicating a positive net demand for stocks.  This suggested that selling into strength might not be the best strategy in a market that is likely to bounce back.

Right now, 3100 is the line in the sand.  A failure to hold above that level will trigger downside follow-through and a test of the more important support near the 3085 zone should be expected.

Short-term trading range: 3085 to 3112.  S&P has support near 3100.  A failure to hold above that level has measured move to 3085.  The index has resistance near 3112.  A breakout above that level has measured move to 3138.

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, based upon recent trading action, the S&P is in a short-term overbought correction.  Although seemingly vulnerable to further short-term weakness, the overall technical backdrop remains positive so buying into short-term dips remains the most profitable strategy.

 

Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

© All rights reserved and actively enforced.
Note: This is a free edition of The Market Outlook, a daily CEM News subscriber newsletter. To get this column before market opens together with hundreds of technical trading ideas (including stocks and ETFs) every month, please click here.
Subscribe to CEM News to receive more in-depth research from Capital Essence.