S&P Vulnerable To Some Downside Retracement

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Monday December 23, 2019.

We’ve noted in the previous Market Outlook that: “Thursday’s bullish breakout above the important sentiment 3200 mark had helped putting the bulls back onto the driver side of the market.  Over the next few days, we will look for trading behaviors as the S&P probes the lower boundary of the red band, or extreme overbought zone.”  As anticipated, stocks closed higher Friday to end a week that saw solid gains as geopolitical risks abate.  For the day, the S&P advanced 0.5 percent to 3,221.23. The Dow Jones Industrial Average climbed 0.3 percent to 28,455.09. The Nasdaq Composite gained 0.4 percent to 8,924.96.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, close near the unchanged mark at 12.51.

Utilities outperformed amid concerns that growth stocks are so hot right now.  Investors are buying defensive stocks as a backstop if things are going to turn south.  As such, the Utilities Select Sector SPDR ETF (XLU) rose 0.7 percent on the day but is up more than 22 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 XLU.

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 – Utilities Select Sector SPDR ETF (weekly)

Our “U.S. Market Trading Map” painted XLU bars in green (buy) – see area ‘A’ in the chart.  Over the past few weeks, XLU has been basing sideways near the 20-week moving average.  Last week’s rally pushed the ETF above the October falling trend line, signify an upside breakout and bullish reversal.  This is a positive development, opened up for a rapid advance toward the 161.8% Fibonacci extension, near 68.  A close above 65 on a weekly basis will confirm this.

XLU has support near 63.  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, the index moved up to test resistance at the lower boundary of the red band after breaking out above the important sentiment 3200 mark on Thursday.  In accordance to the Japanese candlestick pattern recognition, Friday’s narrow range bar indicates uncertainty – traders refuse to press hard one way or the other just because they are not very sure about the near-term direction.  Although a single bar does not form a trend so this is not a call for a top, rather it is a warning signal, a sign in which the market is telling us that it is ready for a pause.

Over the next few days, the most important to watch is trading behavior near the lower boundary of the red band, or extreme overbought zone, currently at 3221.  As mentioned, the normal behavior for the S&P has been to consolidate and retreated almost every time it traded above that level so there is a high probability that a significant consolidation pattern will again develop in this area.

While seemingly vulnerable to a short-term pullback consolidation, Money Flow measure is still above the zero line, indicating a positive net demand for stocks.  This could help putting a short-term floor under the market.

Short-term trading range: 3200 to 3221.  S&P has support near 3200.  A failure to hold above that level has measured move to 3167.  The index has resistance near 3221.  A breakout above that level has measured move to 3287.

Long-term trading range: 3050 to 3210.  S&P has support near 3060.  A failure to hold above that level has measured move to 2940.  The index has resistance near 3230.  A close above that level has measured move to 3380.

In summary, the fact that market is overbought as S&P poked its head into the level that had been successful in repelling price action in the past does not favor a sustain breakout.  The overall technical backdrop however, remains bullish so we’d look to increase upside exposure on market dips rather than chasing breakouts.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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