S&P in Overbought Consolidation but Downside Risk Limited

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Monday January 13, 2020.

Stocks fell on Friday, reversing from all-time highs, as investors digested weaker-than-expected jobs data.  The U.S. economy added 145,000 jobs in December. Economists expect the U.S. economy to have added 160,000 jobs in December.  Wages also disappointed, growing by just 2.9 percent on a year-over-year basis.  Economists had forecast a gain of 3.1 percent. December was also the first month since July 2018 that wages grew by less than 3 percent from the year before.

For the day, the S& lost 0.3 percent to 3,265.35.  The Dow Jones Industrial Average fell 0.5 percent to 28,823.77. The Nasdaq Composite dipped 0.3 percent to 9,178.86.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, rose less than 1 percent to close at 12.56.

Retailers edged lower amid concerns that the economy is slowing down, after hiring data fell short of estimates and wage growth was the weakest in more than a year.  As such, the SPDR S&P Retail ETF (XRT) fell 0.29 percent on the day after climbed more than 12 percent in 2019, underperformed the S&P.  Now the question is whether recent weakness is a pause that refreshes or it’s a beginning of something worse?  Below is an update look at a trade in XRT.

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 Retail ETF (weekly)

Our “U.S. Market Trading Map” painted XRT bars in red (sell) – see area ‘A’ in the chart. Over the past few weeks, XRT has been trending lower in a short-term corrective mode after the October rally ran out of steam near the prior high set in early 2019.  Last week’s selloff is testing support at the 45 zone.  that level is significant in charting terms.  A failure to hold above it will bring the 1-year moving average, just above 43, into view.

XRT has resistance near 46.50.  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 January 8, 2020 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”]

Once again, the S&P retreated after the early rally attempt ran into resistance at the lower boundary of the red band, or extreme overbought zone.  Momentum indicator shifted lower from near overbought zone, suggesting further short-term weakness likely.  While these elements might slightly affect trading sentiment over the coming days, Money Flow measure remains supportive so downside risk could be limited.

For now, 3200 is the line in the sand.  A close below that level will trigger another selloff with initial downside target near 3150.  Resistance is at the lower boundary of the red band, currently at 3283.  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 3225.  A failure to hold above that level has measured move to 3200-3150.  The index has resistance near 3283.  A breakout above that level has measured move to 3350.

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, an overbought pullback consolidation interrupted the late December rally in the S&P.  Although seemingly vulnerable to further short-term weakness, the overall technical backdrop remains positive so sell-off could be shallow because the sideline money will try to fight its way back into the market.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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