S&P in Digestion Period Prior To New Upswing

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Thursday December 12, 2019.

We’ve noted in the previous Market Outlook that: “S&P is in a holding pattern as traders wondered whether more gain is warranted given the massive advance over the past months. While the near-term technical outlook remains positive, a close above 3150 is required to neglect the short-term downward trend pressure.  On balance, we remain bullish on the S&P and looking to buy into market dips.”  As anticipated, stocks closed slightly higher Wednesday after the Federal Reserve indicated it will likely not raise rates in 2020.  For the day, the Dow Jones Industrial Average added 0.10 percent to 27,911.30. The S&P climbed 0.3 percent to 3,141.63. The Nasdaq Composite advanced 0.4 percent to 8,654.05.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell more than 4 percent to 14.99.

Most S&P sectors finished positive, with materials and technology leading the way as traders appeared to be betting that the Trump Administration will hold off on imposing new tariffs on imports from China.  As such, the Materials Select Sector SPDR ETF (XLB) rose 0.75 percent on the day and is up about 19 percent year to day, underperformed the S&P.  Now the question is whether the rally has more legs?  Below is an update look at a trade in XLB.

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 – Materials Select Sector SPDR ETF (weekly)

Our “U.S. Market Trading Map” painted XLB bars in green (buy) – see area ‘A’ in the chart. Over the past few weeks, XLB has been basing sideways near the early November breakout point as it works off overbought conditions.  This is a positive development, suggesting that XLB will breakout to new high as soon as it works off excessive optimism.  Immediate resistance is around 61.50.   That level was tested several times over the past months.  A sustain advance above it on a weekly basis signify a bullish breakout with an upside target just above 64.

XLB has support near 59.  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 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”]

The big picture remains the same.  S&P continues basing sideways using the lower boundary of the pink band as support. That level roughly corresponds with last week’s bullish breakaway gap.  Money Flow measure is above the zero line, indicating a positive net demand for stocks.  The fact that buying pressure remains positive as S&P approaching the all-time high set in late November indicated an internal strength.  It increases the probability that the market will take another leg higher as soon as it works off excessive optimism.  While more backing and filling would not be a surprise, a close below 3100 would see a massive pickup in volatility.  We’d turn particularly bearish if the index closes twice below that level.

S&P is developing a consolidation pattern between 3120 and 3150.  The development of the new uptrend starts when the S&P moves out of the congestion band.  The new uptrend is confirmed when the index is able to hurdle and sustain above 3150.  That, if happen, could trigger acceleration toward the important sentiment 3200 mark.

Short-term trading range: 3120 to 3150.  S&P has support near 3134.  A failure to hold above that level has measured move to 3120.  The index has resistance near 3150.  A breakout above that level has measured move to 3175.

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, the big picture remains the same. There is an orderly pullback consolidation, which represents digestion period.  The fact that the index managed to hold on to most of recent gains despite overbought conditions, indicating an internal strength.  This increases the probability that the S&P will break out from current trading range as soon as the market shakes off the excessive bullishness.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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