Expect Increase in Near-term Volatility as S&P Tests 3200

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Monday February 3, 2020.

The S&P capped the first month of the new decade with its biggest daily loss since October as coronavirus-led selling intensified on concerns a pandemic could send the global economy into turmoil.  For the day, the bench mark gauge tumbled 1.8 percent to 3,225.52. The Nasdaq Composite dropped 1.6 percent to 9,150.94.  The Dow Jones Industrial Average dropped 2.1 percent to 28,256.03.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, surged more than 21 percent to close at 18.84.

Industrials underperformed amid Caterpillar (CAT) and Honeywell (HON) weak quarterly results and guidance.  Caterpillar fell 3 percent after reporting mixed quarterly results and offering up a weaker-than-expected outlook on full-year performance, warning that global economic uncertainty would continue to weigh on performance.  Honeywell also slipped about 3 percent as its quarterly revenue missed Wall Street estimates, with the industrial pinning the blame on impact from the grounding of Boeing’s 737 Max.  As such, the Industrial Select Sector SPDR ETF (XLI) tumbled 2.31 percent on the day and is down less than 1 percent YTD, underperformed the S&P.  Now the question is whether recent pullback is a pause that refreshes or it’s beginning of something worse?  Below is an update look at a trade in XLI.

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 – Industrial Select Sector SPDR ETF (weekly)

Our “U.S. Market Trading Map” painted XLI bars in red (sell) – see area ‘A’ in the chart. XLI has been on a tear in recent weeks after breakout in early January.  The rally found resistance near the 85 zone.  Last week’s massive selloff pushed the ETF down to support at the 80 zone.  That level roughly corresponds with the prior highs set in 2018.  A close below 80 has measured move to around 78, or the 1-year moving average.

XLI has resistance near 85.  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 down to test support at the trend channel moving average after recent rally attempt failed at Monday’s bearish breakaway gap.  Momentum has been weakened following recent selloff, suggesting further short-term weakness likely.  Right now, the most important thing to watch is the retreat and rebound behaviors near 3200.  A close below that level would see a massive pickup in volatility. Money Flow measure has been deteriorated but still above the zero line, indicating a weak net demand for stocks.  This could help putting a short-term floor under the market.

Short-term trading range: 3200 to 3300.  S&P has support near 3200.  A failure to hold above that level has measured move to 3110.  The index has resistance near 3280.  A breakout above that level has measured move to around 3300.

Long-term trading range: 3120 to 3430.  S&P has support near 3120.  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 3430.

In summary, our near-term work on price pattern and momentum suggested that the S&P is in a midst of a short-term overbought correction.  Money Flow measure and momentum had been deteriorated following recent selloff.  We expect increase in near-term volatility as the index tests support at the 3200 zone. This area is too big and too important to fall quickly so it should not be surprising to see some backings and fillings in the coming days.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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