S&P Established Important Near-term High

Editor’s note: this column was originally published on Capital Essence’s CEM News. It’s being republished as a bonus for the loyal readers. For more information about subscribing to CEM News, please click here.

 

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

We’ve noted in the previous Market Outlook that: “S&P’s quick run is showing some signs of exhaustion.  Thursday’s selloff suggested that the index is in for a ‘range-bound’ trading environment.  This is a rally and retreat environment. It is not a trending environment. Short-term traders can anticipate continued volatility with rapid up and down moves in the market.”  As anticipated, stocks closed lower Friday as investor sentiment was rocked by fresh U.S.-China worries as Donald Trump threatened action against Beijing over the Covid-19 pandemic.  The Dow Jones Industrial Average fell 2.5 percent to 23,723.69.  The S&P dropped 2.8 percent to 2,830.71. The Nasdaq Composite dropped 3.2 percent to 8,604.95.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, surged about 9 percent to 37.19.

Tech titan Amazon (AMZN) led declining stocks on the week’s final day of trading with shares down 7.6 percent after announcing plans to spend all its second-quarter profits on its coronavirus response.  Apple (AAPL) reported quarterly earnings that topped analyst expectations, but its revenue growth remained flat on a year-over-year basis, shares dropped 1.6 percent.  As such, the Technology Select Sector SPDR ETF (XLK) fell 2.75 percent on the day and is down about 3 percent YTD, outperformed the S&P.  Now the question is what’s next?  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 green (buy) – see area ‘A’ in the chart. XLK has been on a tear in recent weeks after the February selloff found support near the 38.2% Fibonacci retracement. That level roughly corresponds with the 4-year moving average.  The late March rally is testing resistance at the 90 zone.  Last week’s bearish doji candlestick suggested that the resistance would hold.  Right now, follow-through is the key.  A consecutive close below 90 has measured move to around 85.  That level is significant in charting terms.  A failure to hold above that level on a weekly closing basis will turn the short-term trend down and a retest of the March low would be expected.

XLK has resistance near 92.  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 shifted to bearish (sell).  Last changed May 1, 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, S&P sold off after last week’s recovery rally ran out of steam near the early March breakdown point, just below the important sentiment 3000 mark.  Market internal deteriorated following recent selloff, suggesting the index might have to move to a much lower level to attract new buyers.  Over the next few days, traders should monitor trading behaviors as the 2800-2750 zone is tested as support.  If the market is going to find a bottom in the near term, we want to see the S&P stabilizes near 2750.  A close below that level increases the probability for a retest of the March low.

Short-term trading range: 2750 to 3000.  S&P has support near 2800.  A failure to hold above that level has measured move to around 2750.  The index has resistance near 2950.  A breakout above that level has measured move to around 3000.

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, our near-term work on price pattern and momentum suggested that an important near-term high has been established and the S&P shifted to correction mode.  The big test for the index is less than 1 percent below its currently level, which it needs to hold on a consecutive daily closing basis, according to our work, in order to prevent a test of secondary support in the 2750 zone.

 

Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

© All rights reserved and actively enforced.
Note: This is a free edition of The Market Outlook, a daily CEM News subscriber newsletter. To get this column before market opens together with hundreds of technical trading ideas (including stocks and ETFs) every month, please click here.
Subscribe to CEM News to receive more in-depth research from Capital Essence.v