Traders Should Look To Buy Downside Protection

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Thursday April 30, 2020.

Stocks rallied on Wednesday as Federal Reserve Chairman Jerome Powell stoked hopes of more stimulus and a positive update on a potential drug to treat Covid-19 patients lifted sentiment.  Gilead Sciences (GILD) said a clinical trial evaluating its drug remdesivir in coronavirus patients had met its primary goal, sending its shares nearly 7 percent higher.  The Dow Jones Industrial Average surged 2.2 percent to 24,633.86. The S&P gained 2.7 percent to 2,939.51 while the Nasdaq Composite jumped 3.6 percent to 8,914.71.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell 7 percent to 31.23.

Energy supported the broader market rally, underpinned by a jump in oil prices owing to a smaller-than-expected bid in weekly U.S. crude inventories.  West Texas Intermediate for June delivery surged 22.04 percent to settle at $15.06 per barrel.  As such, the Energy Select Sector SPDR ETF (XLE) jumped 7.41 percent on the day but is down more than 35 percent YTD, underperformed the S&P.  Now the question is what’s next?  Below is an update look at a trade in XLE.

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 – Energy Select Sector SPDR ETF (weekly)

Our “U.S. Market Trading Map” painted XLE bars in green (buy) – see area ‘A’ in the chart. Over the past few weeks, XLE has been basing sideways as it works off overbought conditions.  This week’s rally pushed the ETF above the 2020 falling trend line, signify an upside breakout and bullish reversal.  This is a positive development, opened up for a test of the more important resistance near the 42 zone, or the early March breakdown point and the 23.6% Fibonacci retracement of the 2020 downswing.  A sustain advance above that level on a weekly basis has measured move 50, or the early 2020 breakdown point and the 38.2% Fibonacci retracement.

XLE has support near 34.  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 bullish (buy).  Last changed April 24, 2020 from bearish (sell) – (see area ‘A’ in the chart).

[Note: for more details analysis, please take a look at our “US Market ETF Trading Map”]

Key technical development in Wednesday session was a clear break above the important sentiment 2900 mark.  This is a positive development, opened up for a test of the more important resistance near the 3000 zone. That level roughly corresponds with the lower boundary of the pink band. Not only that it’s a tough level to overcome, momentum indicator is fast approaching overbought zone, suggesting upside gains could be limited.  Adding to concerns is the negative Money Flow measure.  These elements might negatively affect trading sentiment over the coming days.

Short-term trading range: 2900 to 3000.  S&P has support near 2900.  A failure to hold above that level has measured move to around 2830.  The index has resistance near 3000.  A breakout above that level has measured move to around 3050.

Long-term trading range: 2190 to 2950.  S&P has support near 2400.  A failure to hold above that level has measured move to 2000.  The index has resistance near 2960.  A close above that level has measured move to 3300.

In summary, it seemed to us that traders are committed to take the S&P up to the important sentiment 3000 mark.  Nonetheless, the fact that Money Flow measure remains negative as prices ascending does not favor a sustain breakout.  As for strategy, traders should look to buy downside protection for winning positions.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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