S&P May Extend Multi-month Rally Before Meeting Strong Resistance Near 3200

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Friday November 29, 2019.

We’ve noted in the previous Market Outlook that: “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.”  As anticipated, stocks rose slightly on Wednesday, building on their record-setting run with the S&P climbed 0.4 percent to 3153.64 while the Nasdaq Composite advanced 0.7 percent to 8705.18. The Dow Jones Industrial Average gained 0.2 percent to 28,164.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, added more than 1 percent to 11.75.

Consumer discretionary was the best-performing sector in the S&P ahead of Black Friday, rising 0.9 percent as Under Armour shares outperformed. The apparel maker’s stock jumped more than 6 percent after an analyst at Raymond James upgraded it to strong buy from outperform.  As such, the Consumer Discretionary Select Sector SPDR ETF (XLY) rose 0.86 percent on the day, and is up about 25 percent year-to-date, roughly inline with the S&P.  Now the question is whether the rally has more legs?  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 green (buy) – see area ‘A’ in the chart. There is a distinct possibility that a triangle pattern is currently setting up in the weekly chart of XLY.  This week’s rally pushed the ETF above the July falling trend line, signify a bullish breakout.  This is a positive development, opened up for a test of the 124-125 zone, or the prior high set in summer 2019.  A sustain breakout above it will confirm this week’s bullish breakout and trigger acceleration toward the 133 zone, or the 127.2% Fibonacci extension.

XLY has support near 119.  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”]

As expected, S&P continues drifting higher after breakout above the prior high of 3127 set in November 19.  Money Flow measure had trended higher from above the zero line, indicating that net demand for stocks was strong.  This suggests that the index may extend the uptrend that dominated the market since early October.  The next resistance level for the S&P is around 3180 while the psychological resistance is at 3200.

Traders however, must be aware that overbought conditions had returned on a daily basis.  While this is normal during a long-term uptrend, it has usually marked a short-term peak.  So, we’d be cautious against taking large position at this stage of the rally.  Immediate support is around 3128.  A failure to hold above that level will trigger downside follow-through and a test of the more important support near the 3100 zone should be expected.

Short-term trading range: 3128 to 3165.  S&P has support near 3128.  A failure to hold above that level has measured move to 3100.  The index has resistance near 3165.  A breakout above that level has measured move to 3180.

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, despite the overbought condition, the near-term technical bias is on the upside.  The S&P may extend its multi-month rally before meeting strong resistance near the 3200 zone.

 

Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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