S&P in Process of Establishing Important Near-term Top

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 Friday February 21, 2020.

Stocks fell on Thursday after reports of new coronavirus cases in China and other countries intensified fears over the virus’s spread and impact on the global economy.  The Dow Jones Industrial Average fell 0.45 percent to 29,219.98, the S&P lost 0.39 percent to 3,373.23 and the Nasdaq Composite dropped 0.67 percent to 9,750.96.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, jumped more than 8 percent to close at 15.56.

Gold hit seven-year highs on Thursday, extending the rally to eight days, as fears of global contagion emerged from the virus pandemic in China.  Gold futures for April delivery on New York’s COMEX settled up $8.20, or 0.5%, at $1,620.50 per ounce. The session high of $1,626.35 was the highest since February 2013.  As such, the SPDR Gold Shares (GLD) rose 0.41 percent on the day and is up more than 6 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 GLD.

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 – SPDR Gold Shares (weekly)

Our “U.S. Market Trading Map” painted GLD bars in green (buy) – see area ‘A’ in the chart. GLD has been on a tear in recent months after breaking out above the closely watch 146 zone, or the prior high set in September 2019, in early January.  This week’s rally pushed the ETF toward the 153 zone, or the 61.8% Fibonacci retracement of the 2011-2015 downswing.  That level is significant in charting terms.  A sustain advance above it will trigger acceleration toward the 168 zone, or the 78.6% Fibonacci retracement.

GLD has support near 146.  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 shifted to bearish (sell).  Last changed February 20, 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”]

S&P rebounded nicely off support at last week’s bullish breakout point after the early selloff attempt was met with a new wave of buying interest.  This is short-term positive development but let’s notice that Money Flow measure has been diverged from price actions over the past weeks.  This week’s new high printed a bearish divergence as price made a higher high and Money Flow measure a lower high.  This is a negative development, suggesting that the index could be in a process of establishing an important near-term top.  While more backing and filling would not be a surprise, a close below 3337 would see a massive pickup in volatility.

Short-term trading range: 3337 to 3393.  S&P has support near 3337.  A failure to hold above that level has measured move to 3300.  The index has resistance just below 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, our near-term work on price structure and momentum suggested strongly that the S&P could be in a process of establishing an important short-term top.  The index could signal a downward trajectory, depending on how it closes over the next few days.  Initial support is defined by the lower boundary of the pink band, around 3337.  If it closes below that level, the next leg is likely lower, and we’re looking at 3269, based on the trend channel moving average.


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.