S&P in Short-term Overbought Correction

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Monday February 10, 2020.

We’ve noted in the previous Market Outlook that: “market is short-term overbought following recent advance. There could be a sell-off in the offing but it would be shallow if so.”  As anticipated, stocks fell on Friday as worries over the coronavirus’ impact on the Chinese economy outweighed the release of stronger-than-expected U.S. jobs data.  The S&P dipped 0.5 percent to 3,327.71.  The Dow Jones Industrial Average fell nearly 1 percent to 29,102.51 while the NASDAQ Composite slid 0.5 percent to 9,520.51.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, jumped more than 3 percent to close at 15.47

With global growth expected to take a hit amid concerns about the coronavirus, Caterpillar (CAT), a bellwether of global economic activity, fell more than 2.8 percent, pushing materials deeper into the red.  As such, the Materials Select Sector SPDR ETF (XLB) fell 1.43 percent on the day and is down more than 2 percent YTD, underperformed the S&P.  Now the question is whether Friday’s selloff is a pause that refreshes or it’s a beginning of something worse?  Below is an update look at a trade in XLB.

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 – Materials Select Sector SPDR ETF (weekly)

Our “U.S. Market Trading Map” painted XLB bars in green (buy) – see area ‘A’ in the chart. Over the past few weeks, XLB has been trending lower in a short-term corrective mode after the October rally ran out of steam near the 62 zone.  That level was tested several times in 2018.  The common behavior has been to consolidate and retreated every time the ETF touched that level.  The January correction tested and respected support at the 1-year moving average, a key technical level based on moving averages.  Last week’s bullish reversal suggested that an important near-term low has been established and XLB is in an early stage of a new upswing with upside target near 64.  A sustain advance above that level could trigger acceleration toward the 127.2% Fibonacci extension near 71.  Resistance stands in the way of continue rally is at the January high, near 62.

XLB has support just below 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 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”]

S&P fell below the closely watch 3337 mark after climbed above it on Thursday.  This is a short-term negative development because it’s invalidated Thursday’s bullish breakout signal. Momentum indicator shifted lower from near overbought zone, suggesting further short-term weakness likely.  Money Flow measure however, still above the zero line, indicating a positive net demand for stocks.  This could help putting a short-term floor under the market.  With this in mind, we’d look to increase upside exposure into short-term market dips.

Over the next few days, traders should monitor trading behavior as the important sentiment 3300 mark is tested as support.  A failure to hold above that level is bearish and a much deeper pullback should be expected.

Short-term trading range: 3295 to 3367.  S&P has support near 3310.  A failure to hold above that level has measured move to 3295.  The index has resistance near 3347.  A breakout above that level has measured move to around 3367.

Long-term trading range: 3200 to 3350.  S&P has support near 3200.  A failure to hold above that level has measured move to 3000.  The index has resistance near 3350.  A close above that level has measured move to 3520.

In summary, Friday selloff interrupted the early February rally in the S&P.  Although seemingly vulnerable to further short-term weakness, the overall technical backdrop remains positive so sell-off could be shallow and quick because the sideline money will try to fight its way back into the market.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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