S&P in Orderly Consolidation Phase

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 Friday January 31, 2020.

Equity market finished solidly higher Thursday, coming back from a day of mostly sharp losses, after the World Health Organization declared the coronavirus a global health emergency, but backed China’s efforts to contain the outbreak, calming fears of a global pandemic. For the day, the Dow Jones Industrial Average added 0.43 percent to 28,859.44. The S&P rose 0.31 percent to 3,283.66. The Nasdaq Composite added 0.26 percent to 9,298.93.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell more than 5 percent to close at 15.49.

Microsoft led the tech sector higher with a 2.8 percent gain after the tech giant reported better-than-expected quarterly results.  As such, the Technology Select Sector SPDR ETF (XLK) rose 0.86 percent on the day and is up about 7 percent YTD, outperformed the S&P.  Now the question is whether the rally has more legs?  Below is an update look at a trade in XLK.

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 – Technology Select Sector SPDR ETF (weekly)

Our “U.S. Market Trading Map” painted XLK bars in green (buy) – see area ‘A’ in the chart. XLK has been on a tear in recent months after breakout in late October 2019.  This week’s correction is testing support at the 95 zone.  Thursday’s impressive reversal suggested that the support would hold and a retest of the prior high, near 99, should be expected.  A sustain advance above that level will bring the 161.8% Fibonacci extension, just above 104, into view.

XLK has support near 95.  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 bearish (sell).  Last changed January 24, 2020 from bullish (buy) – (see area ‘A’ in the chart).

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

Once again, the S&P rebounded nicely after the early selloff attempt found support near the prior low set earlier this week.  The big picture remains the same.  There is a consolidation near the lower boundary of the pink band, or overbought zone. That level roughly corresponds with the important sentiment 3300 mark.  It was significant when the S&P fell below it in on Monday. Momentum has been weakened but does not appear strong enough to generate a widespread breakdown.  Right now, the most important thing to watch is the rally and retreat behaviors near 3300.  Unless there is a close above that level, the near-term technical outlook remains bearish.  Monday’s intraday low of 3234 is the line in the sand.  A failure to hold above that level will see a massive pickup in volatility.

Short-term trading range: 3200 to 3300.  S&P has support near 3234.  A failure to hold above that level has measured move to 3200.  The index has resistance near 3300.  A breakout above that level has measured move to around 3338.

Long-term trading range: 3150 to 3470.  S&P has support near 3150.  A failure to hold above that level has measured move to 3000.  The index has resistance near 3300.  A close above that level has measured move to 3470.

In summary, we wouldn’t look too much into Thursday’s trading action because it keeps the S&P within its short-term consolidation phase.  While further backings and fillings is expected, the fact that the index manages to hold on to most of the December’s gains is pretty impressive, suggesting that S&P might break to new high as soon as the market shakes off excessive bullishness.


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.