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 Thursday February 20, 2020.

Stocks closed higher Wednesday on hopes of fresh stimulus from Beijing to curb the coronavirus impact, which is showing signs of slowing in China.  The S&P rose 0.5 percent to 3,386.15.  The Dow Jones Industrial Average added 0.4 percent to 29,348.03.  The Nasdaq Composite climbed 0.9 percent to 9,817.18.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell 3 percent to close at 14.38.

Tech stocks rallied strongly as investors bet that supply chain disruption would be limited after China’s Ministry of Industry and Information Technology reportedly vowed to help businesses that were impacted.  As such, the Technology Select Sector SPDR ETF (XLK) jumped 1.29 percent on the day and is up more than 12 percent YTD, outperformed the S&P.  Now the question is whether the rally has more legs?  Below is an update look at a trade in XLK.

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 – Technology Select Sector SPDR ETF (weekly)

Our “U.S. Market Trading Map” painted XLK bars in green (buy) – see area ‘A’ in the chart. XLK has been on a tear in recent months after breaking out above the closely watch 90 zone, or the 127.2% Fibonacci extension in December 2019.  This week’s rally pushed the ETF toward the 104 zone, or the 161.8% Fibonacci extension.  While the multi-month rally appeared to be overextended, if XLK could hold above 100 then a move above 104 would be easier to achieve.  A sustain advance above that level will bring the 150 zone, or the 261.8% Fibonacci extension, into view.

XLK has support near 100.  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”]

Once again, the S&P moved up to test resistance at the lower boundary of the red band after recent pullback found support near last week’s bullish breakout point.  Momentum indicator whipsaws near overbought zone.  Adding to concerns is the lagging Money Flow measure.  The indicator has been trending slightly lower over the past few days as prices breaking out to new highs indicating a lack of commitment among the bulls.  These elements could continue negatively affect trading sentiment in the coming days.  .  Near-term, while more backing and filling would not be a surprise, a close below 3350 would see a massive pickup in volatility.

Short-term trading range: 3350 to 3400.  S&P has support near 3350.  A failure to hold above that level has measured move to 3300.  The index has resistance near 3400.  A breakout above that level has measured move to around 3470.

Long-term trading range: 3200 to 3350.  S&P has support near 3200.  A failure to hold above that level has measured move to 3030.  The index has resistance near 3380.  A close above that level has measured move to 3550.

In summary, while the market could continue to drift higher as trading sentiment remains strong, several leading indicators are pointing toward a fading trend.  As for strategy, we’d look to trim positions into overbought strength, which might take the S&P closer to 3400 before a significant pullback unfolds


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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