S&P Overbought but Momentum Remains Supportive

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Tuesday June 9, 2020.

We’ve noted in the previous Market Outlook that: “S&P cleared key resistance last week. While there seems to be room to go higher, traders must be mindful that the return of overbought conditions on the daily chart.  While overbought condition is normal during a pro-long uptrend, it’s suggested that upside momentum might not sustain without at least a short-term breather.  Short-term traders can anticipate increase short-term volatility with rapid up and down moves in the market.”  As anticipated, stocks rallied once again on Monday, pushing the S&P into the green for the year as expectations for a swift recovery from a coronavirus-driven downturn increased.  For the day, the bench mark gauge rose 1.2 percent to 3,232.39.  The Dow Jones Industrial Average added 1.7 percent to 27,572.44.  The Nasdaq Composite was up 1.1 percent to 9,924.74.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, jumped more than 5 percent to 25.81.

Stocks tied to the reopening of the economy, including airlines and retailers, led the gains once again.  United Airlines was up 14.8 percent, while American Airlines jumped 9.2 percent. Kohl’s added 8.4 percent.  As such, the SPDR S&P Retail ETF (XRT) rose 2.25 percent on the day but is down less than 1 percent YTD, slightly 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 near the 61.8% Fibonacci retracement of the 2009-2018 major upswing. This week’s upside follow-through confirmed last week’s bullish breakout above the 2018 falling trend line, signify a bullish breakout and upside reversal. This is a positive development, opened up for a test of the more important resistance around the 52 zone, or the 2018 high.

XRT has support near 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”]

The big picture remains the same.  The S&P continues drifting higher near the lower boundary of the red band, or extreme overbought zone.  As the chart makes clear, the rallies can continue for some times after the index climbed above the lower boundary of the red band, but in many cases the normal behavior for the S&P has been to consolidate and retreated after it traded above that level so there is a high probability that a significant consolidation pattern will again develop in this area.  Nevertheless, the overall technical backdrop remains supportive over the short to medium-term.  This could help putting a short-term floor under the market.  With that said while more backing and filling would not be a surprise, if the S&P could hold above 3100 then a retest of the February high would be easier to be achieved.

Short-term trading range: 3150 to 3160.  S&P has support near 3150.  A failure to hold above that level has measured move to around 3070.  The index has resistance near 3260.  A breakout above that level has measured move to around 3400.

Long-term trading range: 2190 to 3600.  S&P has support near 3000.  A failure to hold above that level has measured move to 2700.  The index has resistance near 3300.  A close above that level has measured move to 3600.

In summary, overbought conditions have returned on a daily basis but momentum 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 for strategy, traders should look to increase exposure into short-term market dips rather than chasing breakouts.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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