S&P in Extreme Oversold Bounce

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Tuesday March 3, 2020.

We’ve noted in the previous Market Outlook that: “S&P entered period of higher volatility.  The market is extremely oversold following last week’s massive selloff. While there is a high probability that Friday’s late-day rally will momentum, a close above S&P’s 3000 is needed before there is any real prospect of a change in the short-term downward trend pressure.”  As anticipated, growing bets the Federal Reserve will cut rates aggressively this month, investors piled into stocks, especially in late trading. The major indexes closed at their highs of the session.  For the day, the S&P climbed 4.6 percent to 3,090.23.  The Nasdaq Composite surged 4.5 percent to 8,952.16.  The Dow Jones Industrial Average jumped 5.1 percent to 26,703.32.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, dropped more than 16 percent to close at 33.42.

Tech stocks, led by Apple (AAPL), staged comeback amid signs of a slowdown in infections in China and growing investor bets on global central banks adopting aggressive stimulus measures to cushion the impact on from the coronavirus on economic growth.  As such, the Technology Select Sector SPDR ETF (XLK) jumped 5.78 percent on the day and is up 2 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 red (sell) – see area ‘A’ in the chart. Over the past few weeks, XLK has been trending lower in a short-term corrective mode as it worked off overbought conditions.  The correction tested and respected support at the 1-year moving average, a key technical level based on moving averages.  This is a positive development, but XLK has 96 to trade against.  There is no reason to turn particular bullish until this zone is eclipsed.

XLK has resistance near 96.  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 rebounded nicely after last week’s massive selloff pushed the index below the bottom of its short-term trading range.  As mentioned, while it’s uncommon the S&P to break below the bottom of its short-term trading range, such a move lower is often followed by a quick snap back.  As indicated in the above chart, the index broke below the bottom of its short-term trading range in late December 2018, only to bounce back up.

Monday’s massive reversal suggested that the August-October 2019 lows, around 2850, would hold, at least for the time being.  Momentum has been strengthened, allowing additional short-term upside probing.  Nevertheless, Money Flow measure is below the zero line, indicating a negative net demand for stocks.  This will put a cap on the upside.  Right now, follow-through is the key.  A consecutive close above 3000 will confirm Monday’s bullish reversal signal and open up for a test of the more important resistance near 3170.

Short-term trading range: 2855 to 3170.  S&P has support near 3000.  A failure to hold above that level has measured move to around 2855.  The index has resistance near 3100.  A breakout above that level has measured move to around 3170.

Long-term trading range: 2600 to 3400.  S&P has support near 2900.  A failure to hold above that level has measured move to 2600.  The index has resistance near 3000.  A close above that level has measured move to 3400.

In summary, our near-term work on price structure and momentum suggested that the S&P is in an early stage of a short-term oversold bounce. The index has 3100 to trade against.  A sustain advance above that level will turn the short-term trend up and trigger acceleration toward 3170.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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