S&P Might Regroup and Rebound near 3100

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Wednesday February 26, 2020.

We’ve noted in the previous Market Outlook that: “S&P broke key supports Monday, signify a bearish breakout and downside reversal.  While several indicators remain supportive of further pullback, return of oversold conditions on an intraday basis will help putting a short-term floor under the market.  Like a rubber band, stocks tend to snap back to the mean if they have dropped too far from the “fair” value. So it should not be surprising to see at least an attempt to rally in the coming days.”  As anticipated, stocks opened higher in Tuesday session that saw the S&P traded as high as 3246 before sellers stepped in and pushed prices significantly lower.  Contributed to the overall pessimism was a warning from health authorities on the spread of the coronavirus.  The CDC said that Americans should prepare for the “inevitable” spread of Covid-19 and that there will be disruptions to everyday lives of Americans.

For the day, the bench mark gauge slid 3 percent to 3,128.21 while the Nasdaq Composite declined 2.8 percent to 8,965.61.  The Dow Jones Industrial Average tumbled 3.1 percent to 27,081.36.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, surged more than 11 percent to close at 27.85.

Traders were unnerved by the bond market, which pointed to slower economic growth around the world. The 10-year Treasury yield traded at 1.33 percent, hitting an all-time low.  The drop in yields pushed bank stocks lower. Bank of America fell more than 5 percent while JPMorgan Chase closed 4.5 percent lower.  Lower rates could hit bank profit margins.  As such, the Financial Select Sector SPDR ETF (XLF) tumbled 3.39 percent on the day and is down more than 6 percent YTD, underperformed the S&P.  Now the question is whether this week’s selloff is a beginning of an end or there’re more pains ahead?  Below is an update look at a trade in XLF.

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 – Financial Select Sector SPDR ETF (weekly)

Our “U.S. Market Trading Map” painted XLF bars in red (sell) – see area ‘A’ in the chart. Over the past few weeks, XLF has been basing sideways near the 31 zone as it worked off overbought conditions.  This week’s selloff pushed the ETF below the 2019 rising trend line.  That level was significant when XLF climbed above it in late 2019.  This is a negative development, suggesting that XLF might have to move to a much lower level to attract new buyers. Right now the most important thing to watch is trading behaviors near the 28.50 zone, or the 1-year moving average.  A failure to hold above that level has measured move to around 27.

XLF has resistance near 30.20.  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”]

S&P undercut support at January low after the early rally attempt ran out of steam near 3250.  Money Flow measure crossed below the zero line, indicating a negative net demand for stocks.  This is a negative development but let’s notice that Tuesday’s selloff pushed the S&P below the green band and into extreme oversold zone. The market has historically developed significant near-term low around that area.  Additionally, momentum indicator has reached the level that had been successful in repelling price actions in the past. These elements suggested that the index might regroup and rebound from near 3100.  This is a very strong support zone.  A failure to hold above that level will bring the October breakout point, near 3000, into view.

Short-term trading range: 3100 to 3250.  S&P has support near 3100.  A failure to hold above that level has measured move to 3050-3000.  The index has resistance near 3165.  A breakout above that level has measured move to around 3275.

Long-term trading range: 3020 to 3470.  S&P has support near 3170.  A failure to hold above that level has measured move to 3020.  The index has resistance near 3320.  A close above that level has measured move to 3470.

In summary, S&P broke several supports this week.  When key supports broke it means that long-term buying pressure has finally been exhausted.  The stronger the support, the more powerful the selloff.  Nevertheless, support is strong near the 3100 zone.  This could help minimize downside follow-through and widespread breakdowns.

 

Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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