S&P Upside Could Be Limited By Overbought Conditions

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

Stocks rose sharply on Wednesday on the back of better-than-expected economic data, which bolstered optimism over the recovery from coronavirus-led shutdowns.  The Dow Jones Industrial Average jumped 2.1 percent to 26,269.89. The S&P gained 1.4 percent to 3,122.87 while the Nasdaq Composite advanced 0.8 percent to 9,682.91.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell more than 4 percent to 25.66.

Financials jumped more than 4 percent with banks leading the charge amid signs the Covid-19 pandemic’s grip on the economy has passed.  JPMorgan (JPM) was up 5.4 percent, Bank of America (BAC) up 4.5 percent and Citigroup (C) up 4.9 percent.  As such, Financial Select Sector SPDR ETF (XLF) rose 3.73 percent on the day but is down nearly 20 percent YTD, underperformed the S&P.  Now the question is what’s next?  Below is an update look at a trade in XLF.

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 – Financial Select Sector SPDR ETF (weekly)

Our “U.S. Market Trading Map” painted XLF bars in green (buy) – see area ‘A’ in the chart. XLF has been on a tear in recent weeks after the late February massive selloff found some solid footing near the 50% Fibonacci retracement of the 2009-2018 major upswing.  This week’s rally pushed the ETF up against the early March’s bearish breakaway gap.  That level roughly corresponds with the 4-year moving average, just below 26.  A close above 26 on a weekly closing basis signify an upside reversal and trigger acceleration toward 27 zone.

XLF has support near 22.  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”]

After falling more than 1200 points from the February high of 3,393 and meeting anticipated support near the 2200 zone, S&P rebound has taken market above the early March recovery high and toward the lower boundary of the red band.  Technically speaking, S&P a trade above that level often marked short-term market tops.  That’s obviously the most important level to keep on the trading radar.  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.

Short-term trading range: 3080 to 3160.  S&P has support near 3080.  A failure to hold above that level has measured move to around 3000.  The index has resistance near 3160.  A breakout above that level has measured move to around 3300.

Long-term trading range: 2190 to 2950.  S&P has support near 3000.  A failure to hold above that level has measured move to 2700.  The index has resistance near 3200.  A close above that level has measured move to 3500.

In summary, the fact that market is overbought as S&P approached key price level that had been successful in repelling price action in the past suggested that upside gains could be limited.  As for strategy, traders should consider buying into market dips rather than chasing breakouts.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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