S&P May Retest February Low Of 2855 Before Rebounding

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Monday March 9, 2020.

We’ve noted in the previous Market Outlook that: “market internal deteriorated as S&P moved down to test support at the important sentiment 3000 mark, which needs to hold on a weekly closing basis, according to our work, in order to prevent a test of secondary support in the 2850 area.”  As expected, stocks tumbled out of gate Friday as fears of economic damage from the spread of the coronavirus intensified that saw the S&P undercut 3000 and traded as low as 2901 before buyers stepped in and pushed prices off the intraday low.  For the day, the bench mark gauge dropped 1.7 percent to 2,972.37, while the Nasdaq Composite tumbled 1.8 percent to 8,575.62.  The Dow Jones Industrial Average dropped 0.9 percent to 25,864.78.   The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, jumped about 6 percent to close at 41.94.

Investors continued to seek safer assets amid fears that the coronavirus will disrupt global supply chains and tip the economy into a recession. Utilities had its best week since the financial crisis. As such, the Utilities Select Sector SPDR ETF (XLU) surged nearly 8 percent on the week and is up about 4 percent YTD, outperformed the S&P.  Now the question is whether the rally has legs?  Below is an update look at a trade in XLU.

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 – Utilities Select Sector SPDR ETF (weekly)

Our “U.S. Market Trading Map” painted XLU bars in green (buy) – see area ‘A’ in the chart. XLU moved down to test support at the 1-year moving average, a key technical level based on moving average, after the January rally ran out of steam near the 71 zone.  That level roughly corresponds with the 38.2% Fibonacci retracement of the 2018-2020 upswing.  Last week’s bullish reversal suggested that the support would hold.  This is a plosive development, opened up for a rest of the January high, just above 71.  A sustain advance above that level could trigger acceleration toward the 127.2% Fibonacci extension, just above 76.  An upside follow-through this week will confirm this.

XLU has support near 62.  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 March 5, 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 prior low set in late February after last week’s recovery rally ran out of steam near the upper boundary of the green band, around 3140. The index fell below the bottom of its short-term trading range in early Friday session before cut losses rapidly in the final 30 minutes of trading.  It seems to us that the market is desperately trying to form a new trading range.

Momentum indicator shifted lower from near oversold zone, suggesting further short-term weakness likely.  Money Flow measure trended lower from below the zero line, indicating a negative net demand for stocks.  The indicator is at the lowest level going back to late 2018.  While the near-term technical bias skews toward further weakness, we expect extreme daily whipsaws eventually eases as the range tightens.

If the market is going to find a bottom in the near term, we want to see the S&P regroup and climbed above 3050, or the lower boundary of the green band. With that said, if the S&P fails to close above 3050, then the next stop will be 2855 with the possibility of a major correction to 2640.

On the upside, S&P has 3140 to trade against.  A sustain advance above that level suggests that an important near-term low has been established and triggers acceleration toward 3250.

Short-term trading range: 2800 to 3140.  S&P has support near 2855.  A failure to hold above that level has measured move to around 2800.  The index has resistance near 3000.  A breakout above that level has measured move to around 3140.

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 momentum and price pattern suggested that the S&P may retest its February low of 2855 before rebounding. While the near-term technical bias skews toward further weakness, we expect extreme daily whipsaws eventually eases as the range tightens.

 

Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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