Expect S&P To Take A Pause As Overbought Conditions Absorbed

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Tuesday December 17, 2019.

Stocks surged Monday with the major indexes hitting all-time highs as trader cheers strong economic data out of China. Chinese industrial production rose 6.2% in November on a year-over-year basis, topping expectations. Retail sales in China also jumped 8% last month.  For the day, the Dow Jones Industrial Average added 0.4 percent to 28,235.89. The S&P gained 0.7 percent to end the day at 3,191.45 while the Nasdaq Composite jumped 0.9 percent to 8,814.23.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell more than 3 percent to 12.14.

Homebuilder shares attracted strong buying support following report that U.S. homebuilder sentiment advanced in December to the highest level since 1999 amid stronger sales and a surge in prospective buyer foot traffic.  The National Association of Home Builders/Wells Fargo Housing Market Index jumped 5 points to 76, the biggest monthly increase since the end of 2017, and the November figure was revised higher.  As such, the SPDR S&P Homebuilders ETF (XHB) rose 0.22 percent on the day and is up more than 41 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 XHB.

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 Homebuilders ETF (weekly)

Our “U.S. Market Trading Map” painted XHB bars in green (buy) – see area ‘A’ in the chart.  Over the past few weeks, XHB has been basing sideways near the closely watch 46.50 zone, or the prior high set in early 2018.  That level roughly corresponds with the 127.2% Fibonacci extension of the 2011-2018 upswing.  Given the massive rally off the late 2018 low of 30.56, recent consolidation is indeed a positive development, suggesting that the ETF will take another leg higher as soon as overbought conditions has absorbed.  XHB has resistance near 46.50.  A close above that level on a weekly basis will trigger acceleration toward the 161.8% Fibonacci extension, just below 56.

XHB has support near 44.  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”]

S&P is heading toward the important sentiment 3200 zone after breaking out above the November high last week.  Money Flow measure trended higher from above the zero line, indicating a positive net demand.  This is a bullish development but let’s notice that the rally has created overbought conditions.  At 3191, the index is less than 20 points below the red band, or extreme overbought zone.  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.  With that said, while the overall technical backdrop remains positive, we’d be cautious against taking large position at this stage amid overbought conditions.

Short-term trading range: 3160 to 3200.  S&P has support near 3160.  A failure to hold above that level has measured move to 3132.  The index has resistance near 3200-3210.  A breakout above that level has measured move to 3280.

Long-term trading range: 3050 to 3210.  S&P has support near 3050.  A failure to hold above that level has measured move to 2930.  The index has resistance near 3210.  A close above that level has measured move to 3350.

In summary, while the market could continue to drift higher as trading sentiment remains strong, our near-term work on momentum tells us to expect a pause in the next few days as overbought conditions are absorbed.  As for strategy, traders should consider taking partial profits or at least buying downside protections on winning positions.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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