S&P Setup For Short-term Consolidation

Editor’s note: this column was originally published on Capital Essence’s CEM News. It’s being republished as a bonus for the loyal readers. For more information about subscribing to CEM News, please click here.

Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Tuesday December 11, 2012.

We’ve noted in the previous Market Outlook that: “Friday bullish breakout had helped put the S&P 500 index back into the same medium-term uptrend that dominated the markets since early June 2012.  On balance, remain bullish on the S&P and looking to buy into market dips.”  As anticipated, stocks closed higher across the board in narrow trading Monday.


For the day, the Dow Jones Industrial Average eked out a gain of 14.75 points, or 0.11 percent, to end at 13,169.88.  The S&P 500 squeezed out a gain of 0.48 points, or 0.03 percent, to finish at 1,418.55.  The NASDAQ, rose 8.92 points, or 0.30 percent, to close at 2,986.96.  The CBOE Volatility Index, the widely considered the best gauge of fear in the market, closed up 0.94 percent to 16.05.

Among key S&P sectors, materials and industrials gained, while consumer discretionary slipped.  Below is an updated look at a trade in the Industrial Select Sector SPDR (XLI).  The ETF had outperformed the market in recent days and is at an interesting spot.

The graphics below are from our “U.S. Market ETF Trading Map”, which show the near-term technical bias and trading ranges for XLI 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 – Industrial Select Sector SPDR (daily)

As indicated in the above chart, our “U.S. Market ETF Trading Map” was looking at XLI from a Buy side back in November 16, 2012.  XLI had been trending rapidly higher after the November correction tested and respected support at the 50% Fibonacci retracement of the June to September 2012 upswing.  That level roughly corresponds with the September low.  With Monday gains, XLI is up against its range top resistance.  Money Flow surged to the highest level since summer 2012, indicating that traders are getting aggressive in the expectation of higher prices.  This is bullish and suggested that this resistance might not hold for long.

Over the next few days, traders should look for the rally and retreat behaviors as the early September high of 37.83 is tested as resistance.  A sustain advance above that level will break the 3-month sideways trading pattern and open up for a test of the 127.2% Fibonacci extension just below 40.

Support is at the trend channel moving average (as represents by the white line in the chart) currently at 36.45.  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 Buy.  Key technical development in Monday trading session was a close above the trend channel moving average.  Monday upside follow-through served as a confirmation and extension to Friday bullish signal.  This is bullish and set an upside target of 1445, which we’ve determined using the lower edge of the pink band.

Momentum indicator trended higher but is much closer to overbought zone following recent advance, suggested upside momentum might not sustain without at least a short-term setback.  Additionally, Monday narrow range bar indicated indecision and raised the odds for a short-term downside correction.  However, Money Flow measure still hold firmly above the zero line, indicating there was little selling interest.  This increases the probability that the index could be basing sideways as it digests the upside tension rather than falling significantly lower.

Immediate support is at the trend channel moving average, currently at 1416.  A close below that level signals a short-term correction with a downside target of 1398, or last week’s pivot low.

Immediate resistance is at last week’s pivot high of 1424.  A sustain advance above that level will trigger acceleration toward the lower edge of the pink band near 1445.

In summary, our near-term technical bias on the S&P 500 index favors a short-term consolidation near the trend channel moving average of 1416.  Although seemingly vulnerable to a short-term weakness, Money Flow measure still shows a positive net demand for stocks, suggesting that sell-off should be shallow and quick because the sideline money will try to fight its way back into the market.

(By:Michelle Mai for Capital Essence)
© All rights reserved and actively enforced.
Note: This is a free edition of The Market Outlook, a daily CEM News subscriber newsletter. To get this column before market opens together with hundreds of technical trading ideas (including stocks and ETFs) every month, please click here.
Subscribe to CEM News to receive more in-depth research from Capital Essence.