Overbought Conditions Keep Buyers At Bay

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Wednesday December 18, 2019.

We’ve noted in the previous Market Outlook that: “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.”  As anticipated, S&P rose slightly to a fresh an all-time high on Tuesday and posted its longest winning streak since November.  For the day, the broad index closed just above the flat line at 3,192.52 and reached an intraday record of 3,198.25.  The Dow Jones Industrial Average add 0.1 percent to 28,267.16 while the NASDAQ also advanced 0.1 percent to 8,823.36.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, rose more than 1 percent to 12.29.

Consumer stocks outperformed following an upbeat factory output report. Factory output rebounded by more than forecast in November, the Federal Reserve said. It also rose excluding a surge in auto production following the end of the General Motors (GM) strike.  As such, the Consumer Discretionary Select Sector SPDR ETF (XLY) rose 0.44 percent on the day and is up more than 25 percent year to date, slightly underperformed 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.  XLY has been on a tear in recent weeks after the late October correction found support near the June rising trend line.  This week’s upside follow-through confirmed last week’s bullish breakout above the July falling trend line, suggested that the 6-month bullish pennant pattern had resolved itself into a new upswing with an upside target just below 134, which we’ve determined using the 127.2%  Fibonacci extension of the later 2018 to July 2019 upswing.  A close above 124.60 on a weekly basis will confirm this.

XLY has support near 122.  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”]

As expected, S&P consolidates near the important sentiment 3200 zone after breaking out above the November high last week.  The index printed a new intraday high but finished near the intraday low. Money Flow measure trended higher from above the zero line, indicating a positive net demand for stocks.  Momentum indicator is still pointing higher but the return of overbought conditions will put a cap on the upside.

For the near term, the market has carved out key short-term resistance and support levels for traders to monitor.  At 3192, S&P is about 10 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 above the lower boundary of 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.  S&P has minor support near 3172.  If it could hold above that level then a breakout above 3200 would be easier to be achieved

Short-term trading range: 3160 to 3200.  S&P has support near 3172.  A failure to hold above that level has measured move to 3140.  The index has resistance near 3200-3212.  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, although overbought condition is keeping buyers at bay, S&P’s 3200 will continue to act as price magnet.  This could help putting a short-term floor under the market.  As for strategy, traders should consider purchase stocks during short-term dips in the market and stay bullish.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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