Cautiously Optimistic

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Thursday July 2, 2020.

Stocks closed mix Wednesday as improving jobs and manufacturing data and positive coronavirus vaccine data boosted investor sentiment at a time when rising virus cases threaten the outlook.  The S&P added 0.5 percent to 3,115.86. The Nasdaq Composite rose 0.95 percent to 10,154.63. The Dow Jones Industrial Average meanwhile, fell 0.3 percent to 25,734.97.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell nearly 6 percent to 28.62.

Energy fell 2.5 percent, shrugging off rising oil prices as worries over crude demand weighed on sentiment despite data showing U.S. crude stockpiles fell by 7.2 million barrels last week.  As such, the Energy Select Sector SPDR ETF (XLE) fell 2.43 percent on the day and is down more than 38 percent YTD, underperformed the S&P.  Now the question is what’s next?  Below is an update look at a trade in XLE.

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 – Energy Select Sector SPDR ETF (weekly)

Our “U.S. Market Trading Map” painted XLE bars in red (sell) – see area ‘A’ in the chart.  Over the past few weeks, XLE has been trending lower after the March oversold rebound ran out of steam near the 38.2% Fibonacci retracement of the 2018-2020 downswing. The early June correction is testing support at the 23.6% Fibonacci retracement, just above 36.  This week’s bearish trading action suggested that the support might not hold for long and the ETF might have to move to a much lower level to attract new buyers and we’re looking at the March low, around 23.  A close below 36 on a weekly closing basis will confirm this.

XLE has resistance near 47.  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 (buy).  Last changed June 30, 2020 from bearish (sell) – (see area ‘A’ in the chart).

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

Key technical development in Wednesday session was a close above the 3100 zone.  That level was significant when the S&P fell below it last week.  In fact, Wednesday’s upside follow-through confirmed Tuesday’s bullish reversal signal and opened up for a retest of resistance near the 3130-3150 zone.  That level was significant in charting terms.  It acted as strong resistance since the index broke down in early June.  There is no reason to turn particularly bullish until this zone is eclipsed.

On the downside, support is strong near 3000.  A close below that level is outright bearish and a much deeper pullback should be expected and we’re looking at 2900-2700.

Short-term trading range: 3000 to 3150.  S&P has a strong band of support near 3000.  A failure to hold above that level has measured move to around 2900.  The index has resistance near 3150.  A breakout above that level has measured move to around 3180.

Long-term trading range: 2190 to 3600.  S&P has support near 3000.  A failure to hold above that level has measured move to 2700.  The index has resistance near 3300.  A close above that level has measured move to 3600.

In summary, Wednesday’s upside follow-through confirmed Tuesday’s bullish reversal signal.  Our near-term work on price structure and momentum suggested that the S&P is in a reflexive bounce.  Nevertheless, we will be looking for the index to close above the mid-June congestion zone before getting aggressively long again.

 

Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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