S&P Cleared Key Resistance But Upside To Be Limited By Overbought Conditions

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Friday February 7, 2020.

We’ve noted in the previous Market Outlook that: “Wednesday’s upside follow-through confirmed Tuesday’s bullish reversal signal.  While S&P could continue to drift higher as trading sentiment remains strong, given the looming resistance at the lower boundary of the red band, there is no reason to accumulate stocks aggressively at this point.”  As anticipated, stocks closed higher Thursday amid lessening concerns over the economic fallout from the coronavirus outbreak in China.  The S&P gained 0.3 percent to 3,345.78.  The Dow Jones Industrial Average added 0.3 percent to 29,379.77 while the Nasdaq Composite was up 0.7 percent to 9,572.15.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell more than 1 percent to close at 14.96.

Twitter (TWTR) jumped 15 percent after the social media company’s quarterly results topped estimates and strong user additions for the quarter suggested its efforts to purge its platform of bad digital actors are taking shape.  As such, the Communication Services Select Sector SPDR Fund (XLC) jumped 1.25 percent on the day and is up more than 4 percent YTD, slightly outperformed the S&P.  Now the question is whether the rally has more legs?  Below is an update look at a trade in XLC.

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 – Communication Services Select Sector SPDR Fund (weekly)

Our “U.S. Market Trading Map” painted XLC bars in green (buy) – see area ‘A’ in the chart. Over the past few weeks, XLC has been trending lower in a short-term corrective mode after the October rally ran out of steam just above the 127.2% Fibonacci extension.  The January correction found support near 53.80.  This week’s bullish reversal signal suggested that an important near-term low has been established and XLC is in an early stage of a new upswing with upside target near 59.  Resistance stands in the way of continue rally is at the January high, just below 57.

XLC has support near 54.  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 bullish (buy).  Last changed February 4, 2020 from bearish (sell) – (see area ‘A’ in the chart).

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

Key technical development in Thursday session was a clear break above 3337.  That level was significant when the S&P tested and failed in January.  The bullish breakout would be confirmed on another close above 3337 this week, which would support upside follow-through and a test of resistance at the lower boundary of the red band, currently at 3364.  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.  Additionally, overbought conditions has returned on an intraday basis so it should not be surprising to see some backings and fillings in the coming days.

Short-term trading range: 3292 to 3360.  S&P has support near 3292.  A failure to hold above that level has measured move to 3226.  The index has resistance near 3364.  A breakout above that level has measured move to around 34232.

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, S&P cleared key resistance, breaking out above the all-time high set in January.  Consecutive close above 3337 this week would confirm Thursday’s bullish reversal signal, supporting upside follow-through in the days ahead.  However, market is short-term overbought following recent advance. There could be a sell-off in the offing but it would be shallow if so.

 

Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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