S&P Rally Attempt Failed at Formidable Resistance

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Thursday January 30, 2020.

We’ve noted in the previous Market Outlook that: “S&P moved up to test resistance at the lower boundary of the pink band after falling below that level last week.  If the prior support turns resistance then the next leg would be significantly lower and we’re looking at 3200.”  As anticipated, S&P ended slightly lower Wednesday, fell less than 0.1 percent to 3,273.40, amid worries about the impact of the coronavirus outbreak.  The Dow Jones Industrial Average added 0.04 percent to 28,734.45.  The Nasdaq Composite 0.06 percent to 9,275.16.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, rose less than 1 percent to close at 16.39.

Energy stocks were under selling pressure amid lower oil prices.  U.S. West Texas Intermediate crude fell 0.3 percent to settle at $53.33 per barrel as worries about the impact of the coronavirus outbreak on demand and a larger-than-expected build in U.S. inventory weighed on prices.    As such, the Energy Select Sector SPDR ETF (XLE) tumbled 1.05 percent on the day and is down about 9 percent YTD, underperformed the S&P.  Now the question is whether recent selloff is a beginning of an end or there’re more pains ahead?  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 October 2019 rally attempt ran into resistance at the 2019 falling trend line.  This week’s massive selloff pushed the ETF below the closely watch 55 zone, or the August-October lows.  This is a negative development, signify a bearish breakout.  Right now the most important thing to watch is the late 2018 low of 53.35.  A failure to hold above that level will bring the 2016 low, around 50, into view.

XLE has resistance near 58.  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”]

As expected, the S&P moved up to test resistance at the important sentiment 3300 mark after recent selloff found support near the 3230 zone.  That level was significant when the index fell below it 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 retreat and rebound behavior near 3230.  A failure to hold above that level will bring the trend channel moving average, around 3200, into view.

For now, 3300 is the line in the sand.  That level roughly corresponds with Monday’s bearish breakaway gap.  Unless there is a close above 3300, the near-term technical outlook remains bearish.

Short-term trading range: 3200 to 3278.  S&P has support near 3235.  A failure to hold above that level has measured move to 3200.  The index has resistance near 3278.  A breakout above that level has measured move to around 3300.

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, S&P rally attempt failed at formidable resistance.  If the index fails to climb back above 3300 this week, then the next stop will be 3200 with the possibility of a brief breakdown below that level.

 

Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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