Market Needs Positive Catalysts To Build New Leg Higher

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Friday May 8, 2020.

Stocks rallied on Thursday, led by a rise in materials and financials following better-than-expected earnings, while slowing weekly unemployment claims also lifted sentiment.  The Dow Jones Industrial Average added 0.9 percent to 23,875.89. The S&P gained 1.2 percent to 2,881.19.  The Nasdaq Composite rose 1.4 percent to 8,979.66.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell about 8 percent to 31.44

Materials were among the biggest gainers, led by a surge in Corteva (CTVA) after the agricultural input provider’s earnings topped estimates, sending its share price up 5 percent. The company attributed the upbeat results to warmer weather that boosted crop planting.  As such, the Materials Select Sector SPDR ETF (XLB) jumped 2.05 percent on the day but is down more than 16 percent YTD, underperformed the S&P.  Now the question is what’s next?  Below is an update look at a trade in XLB.

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 – Materials Select Sector SPDR ETF (weekly)

Our “U.S. Market Trading Map” painted XLB bars in green (buy) – see area ‘A’ in the chart. XLB is on a tear in recent weeks after the late February selloff found support near the 61.8% Fibonacci retracement of the 2009-2018 major upswing.  The late March rally ran into resistance near the 53 zone.  Nonetheless, last week’s selloff found some solid footing near the 50 zone.  This week’s bullish reversal signify resumption of the March recovery rally.  Over the next few days, traders should monitor the rally and retreat behaviors as the 4-year moving average, just above 55, is tested as resistance.  A close above that level on a weekly closing basis signify a bullish breakout, increases the probability for a rapid advance toward the early 2020 high, around 62.

XLB has support near 48.  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 bullish (buy).  Last changed May 7, 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”]

The big picture remains the same. There is a consolidation within the 2800-2900 trading range, which represents digestion period.  Money Flow measure crossed above the zero line, indicating a positive net demand for stocks.  This is a bullish development, supporting further upside follow-through and a test of the more important resistance near 3000.  As mentioned, 3000 is the line in the sand.  We’d turn particular bullish on consecutive close above that level.

On the downside, S&P has minor support near 2835.  A close below that level will break the April uptrend and a retest of the trend channel moving average, currently at 2731, should be expected.

Short-term trading range: 2740 to 3000.  S&P has support near 2835.  A failure to hold above that level has measured move to around 2731.  The index has resistance near 2900.  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, the big picture remains the same. There’s an orderly high level consolidation near S&P’s 2800-2900 as traders wondered whether more gains are warranted given the massive advance over the past weeks.  While we’re near term bullish on the S&P, we believe that the market needs some sorts of positive catalysts to build up the needed energy for a new leg higher.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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