S&P Cleared Key Levels but Upside to be Limited by Overbought Conditions

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Monday December 9, 2019.

Stocks surged on Friday on the back of U.S. jobs growth that topped analyst expectations.  The Labor Department that showed a 266,000 increase in payroll employment, while the U.S. unemployment rate fell to 3.5 percent.  For the day, the Dow Jones Industrial Average gained just 1.2 percent to 28,015.06. The S&P added 0.9 percent to 3,145.91 while the NASDAQ Composite gained 1 percent to 8,656.53.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell more than 6 percent to 13.62.

Financial stocks saw sizable gains led by SVB Financial (SIVB), Wells Fargo (WFC) and Regions Financial (RF), as interest rates climbed. The 10-Year Treasury yield rose to 1.84 percent.  As such, the Financial Select Sector SPDR ETF (XLF) jumped 1.34 percent on the day and is up about 28 percent year to day, slightly outperformed the S&P.  Now the question is whether the rally has more legs?  Below is an update look at a trade in XLF.

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 – Financial Select Sector SPDR ETF (weekly)

Our “U.S. Market Trading Map” painted XLF bars in green (buy) – see area ‘A’ in the chart. XLF has been on a tear in recent months after the late September correction found support near the 2-year moving average, a key technical level based on moving average.  Last week’s rally pushed the ETF above the closely watch 30.30 zone, or the prior high set in early 2018.  This is a positive development, signify a bullish breakout. Right now follow-through is the key.  A consecutive close above 30.30 will confirm the bullish signal and trigger acceleration toward the 127.2% Fibonacci extension, just above 34.

XLF has support near 29.  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 December 6, 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”]

Key technical development in Friday session was a clear breakout above last Monday’s bearish breakaway gap.  The bullish breakout would be confirmed on a consecutive close above 3122 this week, which would support upside follow-through and a test of more important resistance in the 3150 area in the coming days.  Traders however, must be mindful that S&P is short-term overbought follow recent advance so it should not be surprising to see some backings and fillings in the coming days.

Upside target is around the red band, near 3150-3170.  This is a major resistance level.  The normal behavior for the S&P has been to consolidate and retreated almost every time it traded into the red band so there is a high probability that a significant consolidation pattern will again develop in this area.

Short-term trading range: 3122 to 3170.  S&P has support near 3122.  A failure to hold above that level has measured move to 3042.  The index has resistance near 3150.  A breakout above that level has measured move to 3170.

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, S&P cleared key resistances, breaking out from a short-term downward trend.  Consecutive close above 3122 would signify a breakout and bullish reversal, supporting upside follow-through in the weeks ahead.  However, market is short-term overbought following recent advance. There could be a sell-off in the offing but it would be shallow if so.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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