S&P Overbought but Downside Risk Could be Limited as Momentum Remains Supportive

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Tuesday December 24, 2019.

Stocks closed at record highs on Monday after Donald Trump said an initial U.S.-China trade pact would be signed soon.  The Dow Jones Industrial Average rose 0.34 percent to 28,551.53. The S&P gained 0.09 percent to 3,224.02 and the Nasdaq Composite added 0.23 percent to 8,945.65.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, added nearly 1 percent to close at 12.61.

Energy stocks outperformed after Russia said an OPEC-led producer group may consider easing output cuts next year, offsetting support from some investor optimism that an initial U.S.-China trade deal would be signed soon.  West Texas Intermediate gained 8 cents to settle at $60.52 per barrel.   As such, the Energy Select Sector SPDR ETF (XLE) rose 1.03 percent on the day and is up more than 8 percent year to date, underperformed the S&P.  Now the question is whether the rally has more legs?  Below is an update look at a trade in XLE.

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 – Energy Select Sector SPDR ETF (weekly)

Our “U.S. Market Trading Map” painted XLE bars in green (buy) – see area ‘A’ in the chart.  XLE has been on a tear in recent weeks after the early November correction found support near the late October breakout point.  This week’s rally pushed the ETF up against the 1-year moving average, the level that acted as strong resistance since XLE fell below it in late 2018.  Over the next few days, traders should monitor trading behaviors near 62.  A close above that level on a weekly basis signify a bullish breakout and opened up for a test of the more important resistance near the 66 zone.

XLE has support near 60.  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 continues drifting higher after breaking out above the important sentiment 3200 mark last week.  This week’s rally pushed the index up against the lower boundary of the red band.  As mentioned, the red zone indicated extreme overbought conditions – a situation that often precursor to a meaningful correction.  Nevertheless, Money Flow measure is above the zero line, indicating a positive net demand for stocks.  This certainly would argue that the path with least resistance remains to the upside.

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 3227.  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.

Short-term trading range: 3200 to 3227.  S&P has support near 3206-3200.  A failure to hold above that level has measured move to 3176.  The index has resistance near 3227.  A breakout above that level has measured move to 3292.

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, market is overbought following recent advance.  Nonetheless, Money Flow measure and momentum remain supportive so downside risk could be limited. It is possible that S&P could continue to drift higher as trading sentiment remains strong.  As for strategy, buying into short-term dips remains the most profitable strategy.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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