S&P Upside to be Limited by Overbought Condition

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 Monday September 17, 2018.

We’ve noted in the previous Market Outlook that: ”S&P broke key resistance Thursday, signified the one-week sideways trading pattern had resolved itself into a new upswing.  Nevertheless, overbought conditions on an intraday basis will put a cap on the upside.”  As anticipated, S&P posted a marginal gain on Friday, up 0.03 percent to close at 2,904.98.  The Dow Jones Industrial Average also added just 0.03 percent to close at 26,154.67 while the Nasdaq Composite slipped 0.1 percent to 8,010.04.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market fell more than 2 percent to close at 12.07.


The financial sector was under selling pressure last week as banks stocks were weighed down by a flattening yield curve.  After surging 20 percent in 2017, the Financial Select Sector SPDR ETF (XLF) fell 0.4 percent last week to 28.23, up just over 1 percent YTD while the S&P gained over 8 percent over the same period.  Now the question is whether recent pullback is a pause that refreshes or it’s a beginning of a something worse?  Below is an update look at a trade in XLF.

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 – Financial Select Sector SPDR ETF (weekly)

Our “U.S. Market Trading Map” painted XLF bars in red (sell) – see area ‘A’ in the chart.  The first dominant feature on the chart is the rising trend line starting in early 2016.  The second dominant feature of the chart is the downward trend since early 2018.   Over the past few weeks, the ETF has been basing sideways using the 1-year moving average as support after briefly fell below that level in late June.  This is a bearish development, indicating a lack of commitment among the bulls.  Over the next few weeks, traders should monitor the retreat and rebound behaviors near the blue line, currently at 27.70.  A close below that level on a weekly basis could trigger a new down leg with downside target around 26, based on the 2-year moving average.

XLF has resistance just below 29.  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.  Last changed September 11, 2018 from slightly bearish (see area ‘A’ in the chart).

[Note: for more details analysis, please take a look at our “US Market ETF Trading Map”]

S&P basing sideways using the 2900 level as support after climbed above that level on Thursday.  Money Flow measure trended higher from above the zero line, indicating an increase in buying pressure.  Momentum has been strengthened but the return of overbought conditions on an intraday basis suggesting that this is not a time to be long. For now, 2900 is the line in the sand.  A close below that level has measured move to 2883, based on lower boundary of the pink band.

Short-term trading range: 2883 to 2922.  S&P has support near 2900.  A close below that level will trigger a short-term sell signal with downside target near 2883, based on the lower boundary of the pink band.  That level was tested several times over the past months.  Some aggressive traders might use this level like a magnet to buy.  The index has resistance near 2922, or the lower boundary of the red band.

Long-term trading range: 2700 to 3000.  S&P has support near 2800.  A close below that level will trigger a major sell signal with a downside target near 2700.  The index has resistance near 3000.

In summary, the fact that the S&P is short-term overbought as it tests key sentiment level suggested that upside gains could be limited.  As for strategy, we’d look to trim positions into short-term overbought strength.



Thanks and happy trading.


(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.