Not Time To Accumulate Stocks Aggressively

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Friday January 17, 2020.

We’ve noted in the previous Market Outlook that: “while overbought is putting a cap on the upside the overall technical backdrop remains supportive so downside risk could be limited. It is possible that S&P could continue to drift higher as trading sentiment remains strong.”  As anticipated, stocks rose on Thursday to fresh record highs, fueled by tech stocks, solid retail sales data and upbeat quarterly earnings from Morgan Stanley.  For the day, the S&P jumped 0.8 percent to 3,316.81. The Dow Jones Industrial Average gained 0.9 percent to 29,297.64. The Nasdaq Composite advanced 1.1 percent to 9,357.13.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell less than 1 percent to close at 12.32.

Sentiment was further lifted by data that showed U.S. retail sales rose 0.3 percent in December, in line with economists’ estimates. The retail numbers indicated the U.S. economy maintained a moderate growth pace at the end of 2019 and eased concerns about the sector’s health following disappointing holiday sales reports from Target Corp (TGT) and J.C. Penney Co Inc. (JCP).  As such, the SPDR S&P Retail ETF (XRT) rose 1.30 percent on the day, outperformed the S&P.  Now the question is whether the rally has more legs?  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 green (buy) – see area ‘A’ in the chart. XRT rebounded nicely after the early January correction found support near the September 2019 rising trend line.  This is a positive development, opened up for a retest of the 46.50-47 zone.  That level is significant in charting terms.  A close above it on a weekly basis signify a bullish breakout and trigger acceleration toward the 2018 high, near 53.

XRT has support near 44.70.  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”]

Key technical development in Thursday session was a clear break above 3300.  That level is significant in charting terms.  This is a bullish development but let’s notice that Thursday’s massive rally had pushed the S&P above the lower boundary of the red band and into extreme overbought zone.  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.  Nevertheless, Money Flow measure is above the zero line, indicating a positive net demand for stocks.  This certainly would argue that the near-term risk remains to the upside.

Over the next few day, traders should monitor trading behavior near 3300.  A failure to hold above that level signify a short-term trend reversal with downside target around 3288-3265.  Resistance is at the upper boundary of the red band, currently at 3377.
Short-term trading range: 3288 to 3340.  S&P has support near 3300.  A failure to hold above that level has measured move to 3288-3265.  The index has resistance between 3340 and 3377.

Long-term trading range: 3150 to 3480.  S&P has support near 3150.  A failure to hold above that level has measured move to 3000.  The index has resistance near 3316.  A close above that level has measured move to 3480.

In summary, while the overall technical backdrop remains positive, return of extreme overbought conditions on an intraday basis suggesting that this is not a time to accumulate stocks aggressively.  As for strategy, traders should consider buying downside protection for winning positions.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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