Look to Reduce Exposure into Overbought Strength

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Tuesday November 26, 2019.

We’ve noted in the previous Market Outlook that: “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.”  As anticipated, S&P regained all of last week’s loss and some more to close at record high amid increasing expectations that China and the U.S. will reach a so-called phase one trade deal.  For the day, the bench mark gauge rose 0.8 percent to 3,133.64.  The Nasdaq Composite advanced 1.3 percent to 8,632.49.  The Dow Jones Industrial Average climbed 0.5 percent to 28,066.47.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell more than 3 percent to 11.87.

Tech was the best-performing sector in the S&, rising 1.4 percent. Nvidia led the sector higher with a 4.9 percent gain. Intel’s jumped 2.1 percent while Apple shares added 1.8 percent.  As such, the Technology Select Sector SPDR ETF (XLK) rose 1.46 percent on the day, and is up about 42 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 XLK.

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 – Technology Select Sector SPDR ETF (weekly)

Our “U.S. Market Trading Map” painted XLK bars in green (buy) – see area ‘A’ in the chart.  XLK has been on a tear in recent weeks after breakout above the 82.70 zone in late October. This week’s rally is pushing the ETF toward the closely watch 89 zone, or the 127.2% Fibonacci extension of the 2015-2018 upswing.  That level is significant in charting terms.  A sustain advance above it will trigger acceleration toward the 104 zone, or the 161.8% Fibonacci extension.

XLK has support near 83.  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 shifted to bullish (buy).  Last changed November 25, 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”]

S&P rebounded nicely after recent selloff found support near the important sentiment 3100 mark.  That level was significant when the index climbed above it in mid-November.  This is a positive development. Money Flow measure trended higher from above the zero line but does not confirmed Monday’s new high yet as it still hovers below the mid-November peak.  Adding to concerns is the return of overbought conditions. These elements might put a cap on the upside.  With this in mind, we’d look to reduce exposure into overbought strength, which might take the S&P closer to 3150 before a significant pullback unfolds.

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 3090 zone should be expected.

Short-term trading range: 3100 to 3112.  S&P has support near 3100.  A failure to hold above that level has measured move to 3090.  The index has resistance near 3150.  A breakout above that level has measured move to 3216.

Long-term trading range: 3040 to 3360.  S&P has support near 3040.  A failure to hold above that level has measured move to 2880.  The index has resistance near 3200.  A close above that level has measured move to 3360.

In summary, while the overall technical backdrop remains bullish, overbought conditions returned with Monday’s massive rally, suggesting upside gains could be limited.  With this in mind, we’d look to reduce exposure into overbought strength, which might take the S&P closer to 3150 before a significant pullback unfolds.

 

Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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