Market Internal Deteriorate As S&P Retest 3000

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Wednesday March 4, 2020.

We’ve noted in the previous Market Outlook that: “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.”  As anticipated, S&P initially rose more than 2 percent in early Tuesday session on the Fed’s surprise rate cut. But after brief rally that saw the bench mark gauge traded as high as 3136, the market reversed and followed Treasury yields lower.  For the day, the S&P fell 2.8 percent to 3,003.37 while the Nasdaq Composite pulled back 3 percent to 8,684.09.  The Dow Jones Industrial Average fell nearly 3 percent to 25,917.41.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, surged more than 10 percent to close at 36.82.

Lower interest rates are typically a headwind for banks, weighing on net interest margin, the difference between the interest income generated by banks and the amount of interest paid out to their lenders.  JPMorgan (JPM), Goldman Sachs (GS), and Bank of America (BAC) fell sharply, with the latter down more than 5 percent.  As such, the Financial Select Sector SPDR ETF (XLF) tumbled 3.76 percent on the day and is down more than 12 percent YTD, underperformed the S&P.  Now the question is what’s next?  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 trending lower in a short-term corrective mode after the October rally ran out of steam just above the prior high set in early 2018.  The correction tested and bounced support at the 4-year moving average, a key technical level based on moving averages.  This week’s rebound tested and failed near the 1-year moving average.  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 behavior near 25.68.  A close below that lvel on a weekly basis has measured move around 22.60, or the 50% Fibonacci retracement of the 2015-2018 upswing.

XLF has resistance near 28.40.  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 up to test resistance at the upper boundary of the green band after last week’s massive selloff found support near the August-October 2019 lows, around 2850.  The early rally attempt was met with a new wave of selling interest, sending the S&P down to the bottom of its short-term trading range.  This level is significant in charting terms.  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 and last week, only to bounce back up.

Momentum indicator shifted lower from near oversold zone, indicating an internal weakness.  Over the next few day, it’d be important to monitor trading behavior as the 2950-2850 zone is tested as support.  A close below 2850 would open the flood gate toward the early June 2019 low, around 2730.

On the upside, S&P has 3170 to trade against.  A sustain advance above that level will bring the trend channel moving average, currently at 3260, into view.

Short-term trading range: 2850 to 3170.  S&P has support near 3000.  A failure to hold above that level has measured move to around 2850.  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, market internal deteriorate as S&P moved down to test support at the bottom of its short-term trading range. That level roughly corresponds with the important sentiment 3000 mark.  The longer the index stays near that level, the more vulnerable it is to lower prices.  This is the real danger in the current market.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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