S&P Entered High Volatility Phase

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Monday June 15, 2020.

We’ve noted in the previous Market Outlook that: “market internals deteriorated as S&P’s testing key support.  S&P will have a downward bias this week, pressured by short-term negative momentum but we expect support to remain largely intact.”  As expected, stocks swung between gains and losses on Friday, as investors continued to weigh the economic impact of a potential second wave of Covid-19 infections.  The S&P rose 1.31 percent to 3,041.31 while the Nasdaq Composite added 1 percent to 9,588.81.  The Dow Jones Industrial Average gained 1.9 percent to 25,605.54.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell more than 11 percent to 36.09.

Energy stocks regained some of the prior session lost, though the sector remains on track to close sharply lower amid growing doubts over crude demand in the wake of rising coronavirus infections that threaten to slow the pace of the reopenings across states.  As such, the Energy Select Sector SPDR ETF (XLE) rose 2.52 percent on the day but is down nearly 34 percent YTD, underperformed the S&P.  Now the question is what’s next?  Below is an update look at a trade in XLE.

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 – Energy Select Sector SPDR ETF (weekly)

Our “U.S. Market Trading Map” painted XLE bars in red (sell) – see area ‘A’ in the chart.  XLE has been on a tear in recent weeks after the early January 2020 massive selloff found some solid footing near the 23 zone. The March rally pushed the ETF up against the 38.2% Fibonacci retracement of the 2018-2020 downswing.  Last week’s bearish trading action suggested that the resistance would hold and a retest of support at the March low should be expected.  XLE has minor support near 37.  A close below that level on a weekly closing basis will confirm the bearish signal.

XLF has resistance just below 47.  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 bearish (sell).  Last changed June 11, 2020 from bullish (buy) – (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 rebounded nicely off support at the important sentiment 3000 zone.  The early rally attempt however, ran out of steam just below the 3100 mark.  Money Flow measure trended slightly higher but the indicator is on a verge of turning negative following recent selloff, suggesting that the bulls are losing control of the market.  For now, 3000 is the line in the sand.  A failure to hold above it indicated that long-term buying pressure has been exhausted and a much deeper pullback should be expected and we’re looking at 2900, based on the trend channel moving average.

Short-term trading range: 2900 to 3100.  S&P has a strong band of support between 3000 and 2950.  A failure to hold above 2950 has measured move to around 2900.  The index has resistance near 3100.  A breakout above that level has measured move to around 3260.

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, Money Flow measure and momentum had been deteriorated as S&P worked off excessive optimism.  We expect increase in near-term volatility as the index tests support at the 3000 zone. This area is too big and too important to fall quickly so it should not be surprising to see some backings and fillings in the coming days.

 

Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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