Overbought Conditions Returned on Daily Basis But Momentum Remains Supportive

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Wednesday November 27, 2019.

We’ve noted in the previous Market Outlook that: “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.”  As anticipated, the late buying pushed the S&P to new intraday and closing highs Tuesday, up 0.22 percent to 3,140.52.  The Nasdaq Composite advanced 0.18 percent to 8,647.93.  The Dow Jones Industrial Average climbed 0.2 percent to 28,121.68.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell more than 2 percent to 11.59.

Best Buy reported quarterly earnings and revenue that beat analyst expectations, sending the stock up 9.86 percent. The electronics retailer also hiked its fiscal 2020 profit guidance. Dick’s Sporting Goods also got an earnings boost, jumping 18.62 percent. Better-than-expected earnings from retailers such as Best Buy and Dick’s Sporting Goods gave retailers stocks a boost.  As such, the SPDR S&P Retail ETF (XRT) rose 0.61 percent on the day, and is up more than 9 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 XRT.

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 Retail ETF (weekly)

Our “U.S. Market Trading Map” painted XRT bars in green (buy) – see area ‘A’ in the chart.  XRT rebounded nicely after recent pullback found support near the 1-year moving average, a key technical level based on moving average.  This is a positive development, providing support for further advance.  Over the next few weeks, traders should monitor trading behaviors as the 46 zone is tested as resistance.  A sustain advance above it will trigger acceleration toward the 52-53 zone, or the prior high set in late 2018.

XRT has support near 43.  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 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 continues drifting higher after breakout above the prior high of 3127 set in November 19.  Money Flow measure trended higher from above the zero line, indicating a positive net demand for stocks.  This is a bullish development but the return of overbought conditions suggested a cautious approach in the medium-term.  With this in mind, we’d look to reduce exposure into overbought strength, which might take the S&P closer to 3150, or the lower boundary of the red band, 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: 3120 to 3112.  S&P has support near 3120.  A failure to hold above that level has measured move to 3100.  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, overbought conditions had returned on a daily basis but momentum 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, buying into short-term dips remains the most profitable strategy.

 

Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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