S&P To Take A Breather As Overbought Conditions Absorbed

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Monday December 30, 2019.

We’ve noted in the previous Market Outlook that: “Thursday’s rally pushed the S&P above the short-term sideways trend, signify a bullish breakout.  While there seems to be room to go higher, traders must be mindful that the return of overbought conditions on the daily chart.  While overbought condition is normal during a pro-long uptrend, it’s suggested that upside momentum might not sustain without at least a short-term breather.  Therefore, it’d be important to monitor the breakout and retreat behaviors over the next few days to determine whether breakouts are decisive.”  As anticipated, S&P closed near the unchanged mark at 3,240.02.  The Dow Jones Industrial Average rose 0.08 percent to 28,645.26. The NASDAQ Composite added 0.17 percent to 9,006.62.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, rose more than 6 percent to close at 13.43.

Among S&P sectors, consumer staples, real estate and utilities were the top performers. Energy and materials lagged among the sectors.  As such, the Consumer Staples Select Sector SPDR ETF (XLP) rose 0.45 percent on the day and is up more than 24 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 XLP.

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 Staples Select Sector SPDR ETF (weekly)

Our “U.S. Market Trading Map” painted XLP bars in green (buy) – see area ‘A’ in the chart.  XLP has been on a tear in recent weeks after breaking out above the September falling trend line.  The November rally pushed the ETF above the 127.2% Fibonacci extension, signify bullish breakout. This is a positive development, opened up for a test of the 68 zone, or the 161.8% Fibonacci extension.  An upside follow-through this week will confirm this.

XLP has support near 61.30.  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 consolidates near the lower boundary of the red band after breakout from the 3-day sideways trading pattern.  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.

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 3244.  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 3230.  A failure to hold above that level has measured move to 3200.  The index has resistance near 3244.  A breakout above that level has measured move to 3300.

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, 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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