Expect Continue Near-term Volatility As Bottoming Process Unfolds

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Monday March 16, 2020.

Wall Street ended the week down substantially despite a huge rally into the close on Friday after Donald Trump declared a national emergency, a move that gives him authority to use federal funds to combat the coronavirus outbreak.  For the day, the S&P soared 9.3 percent on the day but down 8.8 percent on the week.  The Dow Jones Industrial Average jumped 9.4 percent on the day but down 10.4 percent on the week.  The Nasdaq Composite surged 9.3 percent on the day but down 8.2 percent on the week.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell more than 23 percent on the day but is up more than 44 on the week to close at 57.83.

The wind got sucked out of gold again on Friday as massive liquidation by investors desperate for cash left the yellow metal with near 4 percent loss and heading for its biggest weekly decline since 1983, as investors preferred cash and continued to sell bullion to meet margin calls across other markets.  As such, the SPDR Gold Shares (GLD) tumbled 3.05 percent on the day but is up 0.3 percent YTD, outperformed the S&P.  Now the question is whether last week’s selloff is a pause that refreshes or it’s a beginning of something worse?  Below is an update look at a trade in GLD.

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 – SPDR Gold Shares (weekly)

Our “U.S. Market Trading Map” painted GLD bars in red (sell) – see area ‘A’ in the chart. GLD has been on a tear in recent weeks after the late 2019 rally pushed the ETF above the 61.8% Fibonacci retracement of the 2011-2015 downswing.  The February rally ran into resistance near the early 2013 breakdown point.  Last week’s massive selloff signify a bearish breakout and downside reversal.  Right now the most important thing to watch is trading behavior near 143, or the 50% Fibonacci retracement.  A close below that level has measured move to around 137-133, or the 1-year moving average and the 38.2% Fibonacci retracement.

GLD has resistance just below 160.  Short-term traders could use that level as the logical level to measure risk against.

Chart 1.2   – S&P 500 index (weekly)

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”]

Looking at the 10-year weekly chart of the S&P we can see that there is currently a test of support at the 2009 rising trend line after the late 2019 rally ran into resistance near the 3400 zone.  Friday’s massive oversold bounce suggested that the support would hold, at least for the time being.  Nonetheless, the rally has proved nothing as far as its staying power or as a possible trend reversal.  The upper boundary of the green band, around 2900, represents key resistance.  There is a no reason to turn particularly bullish until this area is eclipsed.  Traders should expect continue near-term volatility as the bottoming process unfolds.

On the downside, the 2500 zone represents key support.  A failure to hold above that level will bring the late 2018 low, around 2350, into view.  That level roughly corresponds with the 38.2% Fibonacci retracement.  Below it, a more significant support lies at the 50% Fibonacci retracement, just above 2000.

Short-term trading range: 2500 to 2640.  S&P has support near 2500.  A failure to hold above that level has measured move to around 2350.  The index has resistance near 2900.  A breakout above that level has measured move to around 3025.

Long-term trading range: 2260 to 3000.  S&P has support near 2260.  A failure to hold above that level has measured move to 2000.  The index has resistance near 3000.  A close above that level has measured move to 3400.

In summary, it seems to us that S&P found some solid footing near 2500.  This is a positive development that could allow for at least another rally attempt in the coming days.  However, given the damages done over the past weeks, expect continue near-term volatility as the bottoming process unfolds.

 

Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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