Market Internal Deteriorated As S&P Tests Key Support

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Monday February 24, 2020.

We’ve noted in the previous Market Outlook that: “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.”  As anticipated, stocks fell sharply on Friday after the number of new coronavirus cases escalated, fueling worries over a pronounced global economic slowdown.  The S&P slid 1.1 percent to 3,337.75.  The Dow Jones Industrial Average fell 0.8 percent to 28,992.41 while the Nasdaq Composite declined 1.8 percent to 9,576.59.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, surged nearly 10 percent to close at 17.08.

Energy and energy related stocks were the worst hit on worries about a longer-than-expected disruptions to global supply chains and weaker Chinese oil demand.  Brent crude was down 1.4 percent at $58.46 a barrel, while U.S. crude dropped 0.9 percent at $53.38 a barrel.  As such, the Energy Select Sector SPDR ETF (XLE) fell 1.19 percent on the day and is down about 10 percent YTD, underperformed the S&P.  Now the question is whether last week’s selloff is a beginning of an end or there’re more pains ahead?  Below is an update look at a trade in XLE.

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 – Energy Select Sector SPDR ETF (weekly)

Our “U.S. Market Trading Map” painted XLE bars in red (sell) – see area ‘A’ in the chart. Over the past few weeks, XLE has been basing sideways using the late 2018 low as support as traders digested the January selloff.  This is a negative development, suggesting that the ETF will take a new leg lower as soon as it works off oversold conditions.  Over the next few weeks, it’d be important to monitor trading behaviors near the 53 zone.  A close below that level on a weekly basis will bring the summer 2009 low, around 44, into view.

XLE has resistance near 55.  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 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”]

As expected, the S&P moved down to test support at the lower boundary of the pink band after recent rally ran out of steam near the important sentiment 3400 mark.  That level roughly corresponds with the lower boundary of the red band, or extreme overbought zone.  Money Flow measure has been diverged from price actions over the past weeks.  Last 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.

Friday’s downside follow-though confirmed Thursday’s bearish reversal signal.  S&P has minor support near the 3320 zone.  A failure to hold above that level will bring the trend channel moving average, currently at 3274, into view.

Short-term trading range: 3320 to 3370.  S&P has support near 3320.  A failure to hold above that level has measured move to 3274.  The index has resistance near 3370.  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 3030.  The index has resistance near 3380.  A close above that level has measured move to 3550.

In summary, market internal deteriorated as S&P moved down to test support near the 3320 zone.  A failure to hold above key price level means that long-term buying pressure has finally been exhausted.  On balance, we remain near-term negative for S&P as we believe market vulnerable to some downside retracement over the short-to-intermediate term.

 

Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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