Look To Trim Positions Into Overbought Strength

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Tuesday February 11, 2020.

We’ve noted in the previous Market Outlook that: “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.”  As anticipated, stocks opened lower Monday amid concerns about the coronavirus impact that saw the S&P traded as low as 3317 before buyers stepped in and pushed prices higher.  For the day, the bench mark gauge advanced 0.6 percent to 3,352.09 while the Nasdaq Composite gained 1 percent to 9,628.39.  The Dow Jones Industrial Average added 0.6 percent to 29,276.82.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell about 3 percent to close at 15.04

Consumer discretionary outperformed, led by Amazon (AMZN) and L Brands (LB), jumped more than 2% higher as the company is reportedly nearing a deal to sell Victoria’s Secret to private equity company Sycamore Partners.  As such, the Consumer Discretionary Select Sector SPDR ETF (XLY) rose 1.43 percent on the day and is up more than 3 percent YTD, roughly in line with the S&P.  Now the question is whether the rally has more legs?  Below is an update look at a trade in XLY.

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 – Consumer Discretionary Select Sector SPDR ETF (weekly)

Our “U.S. Market Trading Map” painted XLY bars in green (buy) – see area ‘A’ in the chart. XLY has been on a tear in recent days after the late January correction found support near the 2019 rising trend line. This week’s upside follow-through confirmed last week’s bullish breakout above the prior high set in January.  This is a positive development, opened up for a test of the more important resistance near the 134 zone, or the 127.2% Fibonacci extension of the 2018-2019 upswing.

XLY has support near 126.  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 rebounded nicely after recent pullback found support near the early February breakout point.  This is a positive development but let’s notice that with Monday’s gains, the index is about 20 points to lower boundary of the red band, or extreme overbought zone.  Technically speaking, a trade above that level indicates extreme overbought conditions – a situation that often precursor to a meaningful correction.  Nevertheless, Money Flow measure is above the zero line, indicating a positive net demand for stocks.  This certainly would argue that the near-term risk remains to the upside.   With this in mind, we’d look to trim positions into overbought strength.

Short-term trading range: 3330 to 3373.  S&P has support near 3330.  A failure to hold above that level has measured move to 3300.  The index has resistance near 3373.  A breakout above that level has measured move to around 3400.

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, it seemed to us that traders are committed to take the S&P up to the important sentiment 3400 zone.  Over the next few days, we will look for trading behaviors as the index probes the red band.  The market had historically developed key resistance near that level.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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