S&P Tests Support Turned Resistance

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 Tuesday February 4, 2020.

We’ve noted in the previous Market Outlook that: “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.”  As anticipated, stocks rose solidly on Monday, recovering some of the losses from the previous session’s steep sell-off.  The S&P gained 0.7 percent to 3,248.92.  The Dow Jones Industrial Average added 0.5 percent to 28,399.81 while the Nasdaq Composite was up 1.3 percent to 9,273.40.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell more than 4 percent to close at 17.97.

Oil fell to its lowest level in more than a year on Monday as the coronavirus outbreak and its potential impact on demand further hammered crude prices.  U.S. West Texas Intermediate fell 2.8 percent, or $1.45 per barrel, to settle at $50.11 per barrel. Earlier in the session, WTI fell more than 3 percent to $49.92, its lowest level since Jan. 2019.  As such, the Energy Select Sector SPDR ETF (XLE) fell 1.31 percent on the day and is down more than 12 percent YTD, underperformed the S&P.  Now the question is whether recent selloff is an end of a major downswing 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. XLE sold off sharply after the October recovery rally ran out of steam near the 2019 falling trend line.  The January down leg pushed the ETF down to the 2019 lows.  This selloff broke support at the early 2019 low, signify a bearish breakout.  A close below 53 on a weekly basis will confirm this and a test of the 2016 low, around 50, should be expected.  Below that level, there is no significant support until 44, or the summer 2009 low.

XLE has resistance near 56.  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 rebounded nicely off support at the trend channel moving average.  Monday’s recovery rally tested resistance at the lower boundary of the pink band.  That level was significant when the index fell below it last week.  It’s now acting as strong resistance.  Momentum has been strengthened but does not appear strong enough to generate widespread breakouts.  While more backing and filling would not be a surprise, a close above the lower boundary of the pink band, currently at 3280, it is required to neglect the medium-term downward trend pressure.  There is a no reason to turn particularly bullish until this area is eclipsed.

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, Monday’s recovery rally is testing ‘support turned resistance’ near S&P’s 3280.  The short-term technical backdrop remains bearish.  The longer the index stays below that level, the more vulnerable it is to lower prices.

 

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.