S&P In Consolidation Mode But Downside Risk Could Be Limited

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 Tuesday May 5, 2020.

We’ve noted in the previous Market Outlook that: “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.”  As anticipated, stocks sold off in early Monday with the S&P was down 1.2 percent at session low before buyers stepped in and pushed prices higher.  For the day, the bench mark gauge rose 0.4 percent to 2,842.74. The Nasdaq Composite climbed 1.2 percent to 8,710.71.  The Dow Jones Industrial Average added 0.1 percent to 23,749.76.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell more than 3 percent to 35.97

Oil prices pared intraday losses to settle higher for the day.  West Texas Intermediate crude oil for June delivery jumped 3.1 percent to settle at $20.39 a barrel on the New York Mercantile Exchange.  Valero Energy (VLO), Marathon Petroleum (MPC) and Phillips 66 (PSX), were among the biggest gainers, with the latter surging nearly 8 percent.  As such, the Energy Select Sector SPDR ETF (XLE) rose 3.46 percent on the day and is down more than 38 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 trending higher in a short-term corrective mode after the early 2020 selloff found support near the 23 zone.  Last week’s pullback respected support at the March rising trend line.  This is a positive development, increased the probability for a rapid advance toward the 23.6% Fibonacci retracement, around 42.50.  A sustain advance above that level on a weekly closing basis will open up for a retest of the late February breakdown point, around 53.

XLE has support just above 33.  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 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, the S&P moved down to test support at the important sentiment 2800 zone after the late April recovery rally ran out of steam near the early March breakdown point, just below the important sentiment 3000 mark.  The late day rally suggested that the support would hold, at least for the time being.  Market internal has been strengthened but upside momentum does not appeared strong enough to generate widespread breakouts.  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 and climbs above 2880.  A close below 2750 meanwhile, 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 2880.  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, recent trading actions leaving the S&P in what looks to us like an orderly high level consolidation of the late April recovery rally.  The index is holding firmly above 2800, suggesting that downside risk could be limited.  Near-term, there is a high probability of rapid rallies and retreats between 2750 and 3000.  Short-term traders can play the range but the market is volatile and tight stops are advisable.


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