Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Monday September 24, 2018.
We’ve noted in the previous Market Outlook that: “S&P cleared key resistances, breaking out to new high. Consecutive close above 2916 would signify a breakout and bullish reversal, supporting upside follow-through in the weeks ahead. However, market is short-term overbought following recent advance. There could be a sell-off in the offing but it would be shallow if so.” As anticipated, S&P closed slightly lower Friday as weakness in the large-cap tech stocks dragged the market lower. For the day, the bench mark gauge closed around the flat line at 2,929.67, the tech-heavy NASDAQ lost 0.5% while the Dow Jones Industrial Average climbed 0.3 percent to 26,743.50. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market fell over 1 percent to close at 11.68.
Homebuilders were under selling pressure Friday after J.P. Morgan downgraded five homebuilder stocks, said housing recovery will be “tepid.” After surging more than 30 percent in 2017, the SPDR S&P Homebuilders ETF (XHB) fell 0.5 percent to 39.91, down nearly 10 percent YTD while the S&P rose nearly 10 over the same period. Now the question is whether recent pullback is a pause that refreshes or it’s a beginning of something worse? Below is an update look at a trade in XHB.
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 – SPDR S&P Homebuilders ETF (weekly)
Our “U.S. Market Trading Map” painted XHB 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. The downswing tested and held support at the 2-year moving average. In fact, trading action over the past months represents an orderly low level consolidation in the aftermath of the early February massive selloff. This is a negative development, suggesting that XHB might have to move to a much lower level to attract new buyers as soon as it works off extreme oversold conditions. Over the next few weeks, trader should monitor trading behavior near 40, or the 2-year moving average. A close below that level will trigger a new downswing with downside target near 37, based on the 4-year moving average.
XHB has resistance just above 41. 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 18, 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 retreated after Friday early rally attempt ran out of steam near the lower boundary of the red band. That level was significant in charting terms. It was tested several times over the past months. Momentum indicator shifted lower from overbought zone, suggesting some short-term weakness likely. So it should not be surprising to see some kind of a pullback, the way we had in June, July and August, prior to the new upswing.
Short-term trading range: 2900 to 3000. S&P has a strong band of support between 2916 and 2900. A close below 2900 will trigger a short-term sell signal with downside target near 2860, based on the trend channel moving average. The index has resistance near 2940, or the lower boundary of the red band. A close above that level could trigger acceleration toward the upper boundary of the red band, near 3000. A close above that level often marked short-term market top so traders should put it on the trading radar.
Long-term trading range: 2730 to 3050. S&P has support near 2840. A close below that level will trigger a major sell signal with a downside target near 2730. The index has resistance near 3050.
In summary, daily chart of the S&P has shown signs that upside momentum is waning as the index shifted to overbought consolidation phase. Although seemingly vulnerable to further short-term weakness, the overall technical backdrop remains positive so pullback should be shallowed and quick.
Thanks and happy trading.
(By：Michelle Mai for Capital Essence)
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