S&P Shifted to Consolidation Mode

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 10, 2020.

Stocks closed mix Tuesday as gains in technology and expectations for the Federal Reserve to reiterate its accommodative stance on monetary policy kept losses in the broader market in check.  The Dow Jones Industrial Average fell 1.09 percent to 27,272.30. The S&P dropped 0.78 percent to 3,207.18. The Nasdaq Composite rose 0.29 percent to 9,953.75.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, jumped nearly 7 percent to 27.57.

Investor appetite for growth stocks returned with FAANG stocks catching a bid, led by Facebook (FB) and Apple (AAPL).    Apple jumped more than 3 percent as investors cheered a report suggesting the tech giant is set to begin production of iPhone 12 in July.  As such, the Technology Select Sector SPDR ETF (XLK) added 0.47 percent on the day and is up nearly 12 percent YTD, outperformed the S&P.  Now the question is what’s next?  Below is an update look at a trade in XLK.

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 – Technology Select Sector SPDR ETF (weekly)

Our “U.S. Market Trading Map” painted XLK bars in green (buy) – see area ‘A’ in the chart.  XLK has been on a tear in recent months after the late February massive selloff found some solid footing near the 68 zone, or the 38.2% Fibonacci retracement of the 2009-2020 major upswing and the 4-year moving average. This week’s rally pushed the ETF up against the prior high set in February.  That level is significant in charting terms.  A close above it on a weekly closing basis signify a bullish breakout and upside reversal with upside target near 126, or the 127.2% Fibonacci extension.

XLK has support near 94.  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”]

S&P retreated after recent rally ran out of steam near the lower boundary of the red band, or extreme overbought zone.  As mentioned, 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.

While seemingly vulnerable to a further consolidations, Money Flow measure is still above the zero line, indicating a positive net demand for stocks.  This could help putting a short-term floor under the market.  Right now, the most important thing to watch is trading behaviors as the 3200 is tested as support.  That level was significant when the index climbed above it last week.  It’s now acting as strong support.  A failure to hold above it indicated that long-term buying pressure has been exhausted and a much deeper pullback should be expected.

Short-term trading range: 3170 to 3160.  S&P has support near 3170.  A failure to hold above that level has measured move to around 3090.  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, S&P shifted to consolidation mode after last week’s rally ran out of steam near the lower boundary of the red band.  Over the next few days, it will be important to monitor the retreat and rebound behaviors to determine whether recent breakout is decisive.  We’d turn particular bearish if the S&P closes twice below 3200.

 

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