Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Monday January 6, 2020.
Stocks fell on Friday after the U.S. confirmed that an airstrike killed Iran’s top military commander, sending oil prices surging and ratcheting up geopolitical concerns. The Dow Jones Industrial Average fell 0.6 percent to 28,634.88. The S&P gave up 0.7 percent to 3,234.85. The Nasdaq Composite dropped 0.8 percent to 9,020.77. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, soared more than 12 percent to close at 14.02.
Oil prices jumped about 3 percent as Iran vowed revenge for the killing of Qassem Soleimani, head of its elite Quds Force, in an air strike authorized by U.S. President Donald Trump. As such, the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) rose 1.56 percent on the day but down nearly 11 percent in 2019, underperformed the S&P. Now the question is whether the rally has more legs? Below is an update look at a trade in XOP.
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 Oil & Gas Exploration & Production ETF (weekly)
Our “U.S. Market Trading Map” painted XOP bars in green (buy) – see area ‘A’ in the chart. XOP has been on a tear in recent weeks after the November correction found support near the prior lows set in August and October 2019. The December rally pushed the ETF above the 20-week moving average, a key technical level, signify a bullish breakout and upside reversal. This is a bullish development, opened up for a test of the more important resistance near the 25.50 zone. That level is significant in charting terms. A close above it will trigger acceleration toward the 2-year moving average, just above 31.
XOP has support near 22. 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 shifted to bearish (sell). Last changed January 3, 2020 from remains 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 retreated after the late December rally ran out of steam near the lower boundary of the red band, or extreme overbought zone. As mentioned, the normal behavior for the S&P has been to consolidate and retreated almost every time it traded above that level so there is a high probability that a significant consolidation pattern will again develop in this area.
Momentum indicator shifted lower from overbought zone, another sign that the yearend rally has come to an end. These elements increased the probability for a retest of support near 3200.
While seemingly vulnerable to further short-term weakness, Money Flow measure still above the zero line, indicating a positive net demand for stocks. With that said, once the S&P falls to 3200, traders should buy it in anticipation of a substantial recovery rally.
Short-term trading range: 3200 to 3231. S&P has support near 3223. A failure to hold above that level has measured move to 3200. The index has resistance near 3260. A breakout above that level has measured move to 3327.
Long-term trading range: 3050 to 3210. S&P has support near 3130. 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 3450.
In summary, Friday’s bearish trend reversal suggested that the yearend rally might have come to an end. There is a better than average odds that the selloff will momentum, but the overall technical backdrop remains positive so expect the S&P to draw in buyers in any pullback toward the 3200 zone.
Thanks and happy trading.
(By：Michelle Mai for Capital Essence)
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