S&P in Orderly High Level Consolidation Phase

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Wednesday January 8, 2020.

Stocks closed lower Tuesday, led by a fall in energy stocks amid ongoing U.S.-Iran tensions.  The Dow Jones Industrial Average fell 0.4 percent to 28,583.68. The S&P pulled back 0.3 percent to 3,237.18. The Nasdaq Composite ended the day just below the flatline at 9,068.58.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell less than 1 percent to close at 13.79.

Bank of America and J.P. Morgan Chase were downgraded by a UBS analyst, sending their shares down 0.7 percent and 1.7 percent, respectively.  As such, the SPDR S&P Bank ETF (KBE) fell 0.67 percent on the day but was up nearly 27 percent in 2019, slightly underperformed the S&P.  Now the question is whether recent pull back is a pause that refreshes or it’s a beginning of something worse?  Below is an update look at a trade in KBE.

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 – SPDR S&P Bank ETF (weekly)

Our “U.S. Market Trading Map” painted KBE bars in red (sell) – see area ‘A’ in the chart. Over the past few weeks, KBE has been trending lower in a short-term corrective mode after the August 2019 rally ran into resistance at the September 2018 breakdown point.  This is a short-term negative development, increased the probability for a test of support near the 45 zone, or the 2-year moving average.  That level is significant in charting terms.  A failure to hold above it will bring the 4-year moving average, just below 43. into view.

KBE has resistance near 48.  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 shifted to bearish (sell).  Last changed January 7, 2020 from bullish (buy) – (see area ‘A’ in the chart).

[Note: for more details analysis, please take a look at our “US Market ETF Trading Map”]

Once again, the S&P retreated after the early rally attempt ran into resistance near last week’s bearish breakaway gap.  Momentum indicator shifted lower from overbought zone, suggesting further short-term weakness likely.  Money Flow measure holds above the zero line, indicating a positive net demand for stocks.  This could help outing a short-term floor under the market.  The index could signal an upward trajectory, depending on how it closes over the next few days.  For now, 3200 is the line in the sand.  A close below that level will trigger another selloff with initial downside target near 3140.  Resistance is at the lower boundary of the red band, currently at 3265.  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 3265.  S&P has support near 3200.  A failure to hold above that level has measured move to 3140.  The index has resistance near 3265.  A breakout above that level has measured move to 3330.

Long-term trading range: 3050 to 3210.  S&P has support near 3130.  A failure to hold above that level has measured move to 3000.  The index has resistance near 3300.  A close above that level has measured move to 3450.

In summary, recent trading actions leaving the S&P in what looks to us like an orderly high level back-and-forth consolidation of the December massive rally.   There is a high probability that the upper and lower limit of a short-term trading range has been set between the 3250 and 3200 levels on the S&P.  While the near-term technical backdrops favors a break to the upside it will be important to monitor the retreat and rebound behaviors to determine whether breakouts are decisive.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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