Rally Is Merely An Oversold Bounce Within An Ongoing Decline

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Friday September 4, 2015.

We’ve noted in the previous Market Outlook that: “based upon recent trading actions, the S&P is in a process of establishing a W-shape bottom pattern. However, the bulls need to extend the rally mode above the important sentiment 2000 mark to convince the fence sitters (natural buyers who have not bought into recent rally) that the August low is now in the rear view mirror.”  As anticipated, stocks opened significantly higher as traders’ cheers comments from ECB President Mario Draghi that kept quantitative easing unchanged while raising the cap on the amount of any one issue it could buy to 33 percent from 25 percent.  The market however, gave back most of the early gains and closed near the unchanged market after a retest of formidable resistance near S&P’s 1975 was met with a new wave of selling interest.  For the day, the S&P closed up 2.26 points, or 0.12 percent, at 1,951.12.  The Dow Jones Industrial Average closed up 23.12 points, or 0.14 percent, at 16,374.50.  The Nasdaq closed down 16.48 points, or 0.35 percent, at 4,733.50.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell 1.84% to 25.61.

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Notably, D.R. Horton Inc. (DHI) bucked the overall lackluster trading action, rose 1.96% Thursday to close at 31.28.  This is bullish from a technical perspective.  In fact, a closer look at the daily chart of DHI suggests that the stock could climb above 35 in the coming days.  Just so that you know, initially profiled in our June 17, 2014 “Swing Trader BulletinDHI had gained about 32% and remained well position.

The graphics below are from our “U.S. Market ETF Trading Map”, show the near-term technical bias and trading ranges for DHI 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 – D.R. Horton Inc. (daily)

As indicated in the above chart, our “U.S. Market ETF Trading Map” rates DHI as a Buy.   DHI has been on a tear in recent days after the August correction found support near the 38.2% Fibonacci retracement of the October 2014 to August 2015 upswing.  Money Flow measure held firmly above the zero line throughout the correction suggested there was little selling pressure.  Momentum indicator shifted higher from neutral zone, indicating an internal strength.  So, it seems to us that this rally could carry DHI up to the closely watch 35.70 level, or the early 2006 high.  Resistance stands in the way of continue rally is at the August high of 32.37.

Support is at the trend channel moving average (as represents by the white line in the chart), currently at 29.44.  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 Sell.  The index moved up to test Monday’s breakdown point.  In accordance to the Japanese candlestick pattern recognition, Thursday’s shooting star is a clear indication of supply overwhelming demand.  This is bearish and suggested that the S&P might have to move much lower to attract new buyers.  Perhaps the negative Money Flow measure is a best illustration of the bear’s case.

Near-term, the market had carved out key support and resistance for traders to monitor.  Resistance is at the late August high, just below the important sentiment 2000 mark.  The S&P will have to go above that level before there is real confidence that the worst is behind the market.

Immediate support is at 1932, based on the lower edge of the green band.  A failure to hold above that level will bring the weekly pivot low, near 1900, into view.

In summary, so far the upswing that started from September low of 1903 on the S&P has proved nothing as far as its staying power or as a possible major upswing.  That’s being said, until proven otherwise, current advance is a short-term oversold bounce, which should be over sooner rather than later. Although, we would reclassify it as something stronger if we see a more constructive pattern on the S&P chart.

(By:Michelle Mai for Capital Essence)

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