S&P Near-term Risk Remains To The Upside

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Friday January 24, 2020.

We’ve noted in the previous Market Outlook that: “the fact that the S&P managed to hold on to most of recent gains despite overbought conditions is impressive.  This certainly would argue that the near-term risk remains to the upside.  Although overbought condition is keeping buyers at bay, the important sentiment 3400 mark will continue to act as price magnet.  As for strategy, traders should consider purchase stocks during short-term dips in the market and stay bullish.”  As anticipated, stocks traded lower in early Thursday session that saw the S&P traded as low as 3301 before buyers stepped in and pushed prices higher.

For the day, the S&P added 0.1 percent to 3,325.54. The Dow Jones Industrial Average fell 0.1 percent to 29,160.09.  The Nasdaq Composite added 0.2 percent to 9,402.48.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, rose less than 1 percent to close at 12.98.

American Airlines (AAL) rallied 4 percent as its fourth-quarter earnings topped estimates despite a rise in costs from the grounding of the 737 Max. Southwest Airlines (LUV) rose about 3 percent shrugging off a quarterly earnings miss.  As such, the U.S. Global Jets ETF (JETS) jumped 2.05 percent on the day, and is up more than 1 percent YTD, slightly underperformed the S&P.  Now the question is whether the rally has more legs?  Below is an update look at a trade in JETS.

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 – U.S. Global Jets ETF (weekly)

Our “U.S. Market Trading Map” painted JETS bars in green (buy) – see area ‘A’ in the chart. Over the past few weeks, JETS has been basing sideways using the 2-year moving average as support.  This level was significant when the ETF climbed above it in late 2019.  This is a positive development, suggesting that JETS will take another leg higher as soon as it works off overbought conditions.  Over the next few days, traders should monitor trading behaviors near the 31.30 zone.  A close above that level on a weekly basis signify a bullish breakout with upside target near 34.75, or the early 2018 high.

JETS has support near 30.50.  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”]

As expected, the S&P moved down to test support at the important sentiment 3300 mark after recent rally ran out of steam near the lower boundary of the red band.  In accordance to the Japanese candlestick pattern recognition, Thursday’s long-legged doji candlestick suggested that demands are overwhelming supply and that the near-term risk remains to the upside.  Perhaps the positive Money Flow measure is the best illustration of the bulls’ case.

Resistance is at the lower boundary of the red band, currently at 3340.  As mentioned, a trade above that level indicates extreme overbought conditions.  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.  For now, 3300 is the line in the sand.  A failure to hold above that level signify a short-term trend reversal with downside target around 3290-3270.

Short-term trading range: 3300 to 3340.  S&P has support near 3300.  A failure to hold above that level has measured move to 3290-3270.  The index has resistance between 3340 and 3370.

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, Thursday’s long-legged doji candlestick pattern together with the positive Money Flow measure suggested that demands are overwhelming supply and that the near-term risk is to the upside.  As for strategy, buying into short-term market dips remains the most profitable strategy.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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