S&P Fast Approaching Key Level That Could Spark The Next Painful Drop

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 Wednesday June 3, 2020.

We’ve noted in the previous Market Outlook that: “while the short-term overbought condition is keeping buyers at bay, the overall technical backdrop remains supportive so downside risk could be limited. It is possible that S&P could continue to drift higher as trading sentiment remains strong.”  As anticipated, a late-session rally pushed Wall Street to solid gains on Tuesday as market participants looked past widespread social unrest and pandemic worries to focus instead on easing lockdown restrictions and signs of economic recovery.  The S&P gained 0.8 percent to 3,080.82.  The Dow Jones Industrial Average climbed 1.1 percent to 25,742.65. The Nasdaq Composite advanced 0.6 percent to 9,608.37.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell nearly 5 percent to 26.84.

Violent protests continued to erupt across U.S. cities over the death of George Floyd and threaten to undo some of the economic reopening progress made so far.  Several companies, including Target (TGT), Walmart (WMT), and Apple (AAPL) temporarily shut some of their stores as protests turned violent.  The iconic Herald Square Macy’s flagship store in New York City was looted Monday.  The SPDR S&P Retail ETF (XRT) rose 2.34 percent on the day but is down more than 8 percent YTD, underperformed the S&P.  Now the question is what’s next?  Below is an update look at a trade in XRT.

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 S&P Retail ETF (weekly)

Our “U.S. Market Trading Map” painted XRT bars in green (buy) – see area ‘A’ in the chart. XRT has been on a tear in recent weeks after the late February massive selloff found some solid footing just above the 61.8% Fibonacci retracement of the 2009-2018 major upswing.  The late March rally pushed the ETF above the closely watch 1-year moving average, just below 41.  This week’s upside follow-through confirmed last week’s bullish breakout.  This is a positive development, opened up for a test of the more important resistance near the 43.50 zone, or the 2018 falling trend line.  That level is significant in charting terms.  A sustain advance above that level signify an upside reversal and trigger acceleration toward the 2018 high, around 53.

XRT has support just below 41.  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 May 18, 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”]

As expected, the S&P continues drifting higher after climbed above the closely watch 3000 mark last week.  This is a short-term positive development but let’s notice that with Tuesday gains, the index is fast approaching the late February breakdown point, the level that could spark the next painful drop.  Technical speaking, if price climbs up to meet a resistance on its way up, there is a good chance that it will fall back. Adding to concerns is the overbought conditions.  While seemingly vulnerable to some short-term setbacks, the overall technical backdrop remains supportive over the short to medium-term.  This could help putting a short-term floor under the market.  With this in mind we’d look to increase exposure into short-term market dips rather than chasing breakouts.

For now, 3000 is the line in the sand.  That level is significant in charting terms.  A failure to hold above that level warns of secondary correction with target of 2800, based on the trend channel moving average.

S&P has resistance near 3080 while the psychological resistance is at 3100.

Short-term trading range: 2960 to 3080.  S&P has support near 3000.  A failure to hold above that level has measured move to around 2960.  The index has resistance near 3080 while the psychological resistance is at 3100.  A breakout above that level has measured move to around 3130.

Long-term trading range: 2190 to 2950.  S&P has support near 2800.  A failure to hold above that level has measured move to 2500.  The index has resistance near 3150.  A close above that level has measured move to 3500.

In summary, with the S&P’s fast approaching the level that could spark the next painful drop, traders should look to reducing exposure into overbought strength or at least buying downside protection for winning positions.


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