S&P Could Consolidate Prior To New Upswing

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Monday November 26, 2012.

We’ve noted in the previous Market Outlook that: “despite the overbought condition, the S&P 500 index continues drifting higher just beneath the strong band of resistance between the 1397 and 1403 levels, or the upper edge of the green band and the late October low.  This is bullish and indicating an increase in risk appetite.  Perhaps, the rising Money Flow measure is the best illustration of the bulls’ case.  Over the next few days, we will look for the rally and retreat behaviors as the 1400 level is tested as resistance.”  As anticipated, stocks began Friday s abbreviated session with a bullish bias. The sentiment was maintained into the close as the S&P tested and held above the important sentiment 1400 mark.  However, trading volume was thin following the Thanksgiving holiday on Thursday.

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For the day, the Dow Jones Industrial Average rose 172.79 points, or 1.35 percent, to close at 13,009.68.  The S&P 500 added 18.12 points, or 1.3 percent, to close at 1409.15.  The NASDAQ gained closed up 40.30, or 1.4 percent, to close at 2966.85.  Both the S&P and NASDAQ ended higher for the fifth-straight session.  The CBOE Volatility Index, the widely considered the best gauge of fear in the market, fell 1.11 percent to 15.14.

The technology sector outperformed the broader market in Friday trading session.  Within the space, SAP Aktiengesellschaft ADR (SAP) surged to new all-time high, up 2.63% to 77.21.  This is bullish from a technical perspective.  In fact, as the chart below indicated, SAP could climb up to test the important 80 mark as it extends recent winning streak.  Just so that you know, initially profiled in November 15, 2012 “Swing Trader BulletinSAP had gained about 9% and remained well position.

The graphics below are from our “U.S. Market ETF Trading Map”, which show the near-term technical bias and trading ranges for SAP and the S&P 500 index.  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 – SAP Aktiengesellschaft ADR (daily)

As indicated in the above chart, our “U.S. Market ETF Trading Map” rates SAP as a Buy.  Looking at the 6-month daily chart of SAP, we can see that the trend is clearly bullish with pattern of higher highs and higher lows.  Friday upside follow-through served as a confirmation and extension to Wednesday bullish breakout above resistance at the 2000 high.  Money Flow measure had trended higher from above the zero line, indicating an increase in buying pressure.  This is bullish and opened up for a test of the important sentiment 80 mark.  That level roughly corresponds with the 127.2% Fibonacci extension of the July to November upswing.

Buyers however, must be mindful that SAP had traded outside its short-term trading range and into extreme overbought zone following recent advance so we would wait for at least a consolidation before putting more money to work.  Immediate support is at recent breakout point, just below 75.  Pullback that respects this support is bullish and should consider as buying opportunity.  Below it, a more significant support lies at the trend channel moving average (as represents by the white line in the chart), currently at 72.14.  Only a close below that level can wreck the near-term bullish outlook.

Chart 1.2 – S&P 500 index (daily).

As indicated in the above chart, our “U.S. Market ETF Trading Map” rates the S&P as a Hold.  Key technical development in Friday trading session was a clear break above the important sentiment 1400 mark.  That level roughly corresponds with the October falling trend line and the early November breakdown point.  Friday bullish breakout had helped putting the index back into the medium-term uptrend that had dominated the market since early June.  This is a short-term positive and set an upside target of 1426, which we’ve determined using the trend channel moving average.  This level is significant in charting terms.  It provided support for the July-October upswing.  It also acted as resistance level in the early November recovery rally.  This history indicates an important role in term of resistance.

Money Flow measure had trended higher from above the zero line, indicating an increase in buying pressure.  This is a short-term positive but let’s notice that the index is now extreme overbought following recent advance – a condition that often precursor to a short-term correction.  So, it should not be surprising to see some consolidations in the coming days.

Immediate support is at 1400.  Below it, a more significant support lies at the upper edge of the green band, currently at 1395.  This creates a strong band of support between 1400 and 1395.  Pullback to this support should offer a low risk entry.  Although not expected at this moment, a close below 1395 will invalidate Friday bullish signal and a retest of the November low should follow shortly.

In summary, Friday’s bullish breakout above the closely watch 1400 level on the S&P 500 index signals a resumption of the major upswing that dominated the markets since early June 2012.  However, given the overbought condition there is no big commitment to accumulate stocks aggressively at this point.  As for strategy, there is a high probability that the S&P would consolidate before a new leg higher, we would look to increase upside exposure on market dips rather than chasing breakouts.

(By:Michelle Mai for Capital Essence)
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