S&P In Digestion Period

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Thursday December 26, 2019.

We’ve noted in the previous Market Outlook that: “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.”  As anticipated, stocks closed near the flat line Tuesday as investors paused after a record-setting rally fueled by improving U.S.-China trade relations that has put the market on course for its best year since 2013.   The Dow Jones Industrial Average fell 0.13 percent to 28,515.45. The S&P lost 0.02 percent to 3,223.38 and the Nasdaq Composite added 0.08 percent to 8,952.88.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, added less than 1 percent to close at 12.67.

Industrials lagged the most among S&P sectors, while real estate was the top gainer.  As such, the iShares U.S. Real Estate ETF (IYR) rose 0.27 percent on the day and 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 IYR.

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 – iShares U.S. Real Estate ETF (weekly)

Our “U.S. Market Trading Map” painted IYR bars in green (buy) – see area ‘A’ in the chart.  IYR rebounded nicely after the late October correction found support near the 1-year moving average, a key technical level based on moving averages.  This week’s rally pushed the ETF up against the mid-December breakdown point, near 92.60.  That level roughly corresponds with the 20-weekmoving average.  A sustain advance above it signify an upside reversal and a retest of the October high of 96 should be expected.

IYR has support near 89.  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’s basing sideway near the lower boundary of the red band after breaking out above the important sentiment 3200 mark last week. Market is overbought following recent advance but 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 3231.  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 3231.  S&P has support near 3213-3200.  A failure to hold above that level has measured move to 3183.  The index has resistance near 3227.  A breakout above that level has measured move to 3297.

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 big picture remains the same.  There’s an orderly high-level consolidation period near S&P’s 3230-3220, which represented the digestion period in the aftermath of the early December rally.  Market internals remains positive and downside momentum does not appear strong enough to generate widespread breakouts.  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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