The Chart Levels to Watch as MID Outperforms

The S&P MidCap 400 Index has led the charge in the 2019 stock market rally

by Bernie Schaeffer

Published on Jan 28, 2019 at 9:09 AM

The following is a reprint of the market commentary from the February 2019 edition of The Option Advisor, published on January 25. For more information, or to subscribe to The Option Advisor -- featuring 10 new option trades each month -- visit our online store.

The S&P MidCap 400 Index (MID) doesn't get nearly as much play in the media as its big-cap and small-cap counterparts, despite the index providing a broadly diverse window on corporate America. Among MID's top holdings are delivery chain Domino's Pizza (DPZ), natural gas provider Atmos Energy (ATO), shipping concern Old Dominion Freight Line (ODFL), ferrous metals firm Steel Dynamics (STLD), and discount retailer Five Below (FIVE) -- to call out just a few of the recognizable, if not FAANG-level "marquee" names, that drive MID's day-to-day moves.

So far in 2019, though, this group of relatively unglamorous, under-the-radar stocks is more than holding its own. Through the first 15 trading days of the year, MID rallied 7.4% -- comfortably besting the comparable S&P 500 Index (SPX) and Nasdaq Composite (IXIC) gains of 5.3% and 5.9%, respectively, and right on pace with the 7.8% surge notched by the more breathlessly followed Russell 2000 Index (RUT).

At best, MID can usually hope only to be lumped in with the small-cap benchmark RUT, but in this month's commentary we'll take a look at outperforming MID on its own terms, as the "happy medium" index entered 2019 sandwiched between a pair of long-term moving averages that have served as key support and resistance in the past -- and which currently coincide with a couple of half-century levels, effectively adding an additional layer of technical intrigue to the mid-cap chart.

Following the painful, panic-driven sell-off in stocks that persisted through the penultimate week in December, MID closed out calendar year 2018 by settling narrowly above its 48-month moving average, a trendline that corresponds with four years' worth of price action. This moving average, which had just crossed above the 1,650 half-century level, previously marked MID lows in January, March, and July 2008, before switching roles to act as resistance from December 2009 through February 2010. The 48-month then emerged again to mark lows in August and October 2011, and more recently was a floor for MID during the January-February 2016 stock market turmoil.

Like the rest of the equities market, MID bounced sharply from its Christmas Eve closing low, which brought the mid-cap tracker within a chip shot of its 24-month (two-year) moving average. This trendline, measuring half the time span of its 48-month counterpart, is currently leveling off just below another half-century mark at 1,850. MID closed barely below its 24-month during the October 2018 sell-off before moving higher into November -- and prior to that low point, this trendline marked the early November 2016 pre-election lows, as well as the October 2014 nadir.

While even a cursory review of the accompanying chart will prove to the viewer the importance of half-century levels for MID, it's worth calling out a few recently relevant price points in particular. Namely, MID set a record high close of 2,050.23 back on Aug. 29 of last year -- an area that's somewhat unlikely to be immediately relevant for the mid-caps, but which could prove to be a serious sticking point as the index mounts future challenges on the overhead millennium level.

Considerably closer at hand to MID's current vicinity -- and fewer than 1.5 points away from the site of the 24-month moving average, as of this writing -- is 1,845.21, which marks a 10% correction from the all-time closing high cited in the above paragraph. This price point, hovering in such close proximity to both the round 1,850 half-century mark and the 24-month trendline, helps to solidify a formidable cluster of potential resistance levels that MID must surmount as it looks to battle back from its fourth-quarter freefall.

Of course, to hyper-focus on 1,850 would be to overlook the obvious concern that is the 1,800 century level, which has yet to be decisively reclaimed since a Dec. 7 breach. In addition to its psychological significance as a major round number, 1,808 represents a 50% retracement of the Aug. 29 closing high and the Dec. 24 closing low. Previously, 1,800 marked lows in February and November 2018, and prior to that was the September 2017 month-end intraday closing high.

Further, MID appears to be following suit with the S&P at the moment by backing down from a test of its 80-day moving average, which capped the index's session high last Friday, Jan. 18. This trendline is only 0.8% above the 1,800 level, as of this writing -- establishing the 80-day as yet another "rung" on MID's overhead ladder of likely obstacles.

That said, at this early stage, it looks as though 2019 so far seems to be shaping up similarly to 2016, per the chart below. That was another case of MID entering January in between its 24-month and 48-month moving averages amid ramped-up volatility, prompted by anxiety over Fed tightening and political uncertainty (though that year turned out fairly well for investors, by the time it was all said and done). As MID pulls back following the steep rally off the Christmas Eve lows, we'd advise keeping the above-mentioned key technical levels in mind to gauge the strength of the index's comeback, particularly as that laundry list of potential resistance points looms again.

mid monthly trendlines chart 0124


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