Path With Least Resistance Remains Higher As Long As S&P Holds Above 3000

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Wednesday June 17, 2020.

Stocks closed higher despite paring some gains Tuesday, as investor sentiment was lifted by data suggesting the economy is on the road to recovery, but gains were kept in check by lingering fears a second wave of the Covid-19 pandemic could be ahead following a sharp uptick in infections in the U.S. and other parts of the world. The Dow Jones Industrial Average rose 2 percent to 26,289.98. The S&P gained 1.9 percent to 3,124.74 while the Nasdaq Composite climbed 1.8 percent to 9,895.87. It was the third straight gain for the major averages.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell more than 2 percent to 33.67.

Retail sales surged 17.7 percent in May, rebounding from a record slump in April. The better-than-expected data suggested that consumer spending is on the mend, though some on Wall Street remained wary over whether the momentum was likely to continue.  Retailers including Macy’s (M), Gap (GPS) and Nordstrom (JWN) surged on the back of the strong retail sales report.  As such, the SPDR S&P Retail ETF (XRT) jumped 2.94 percent on the day but is down more than 6 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. Over the past few weeks, XRT has been basing sideways using the 1-year moving average as support after the late March rally ran into resistance at the 2018 falling trend line.  This week’s bullish trading action suggested that the support would hold and setting the stage for a retest of the 45-46 zone.  A sustain advance above that level will trigger acceleration toward the 2018 high, near 53.

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 shifted to bullish (buy).  Last changed June 16, 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”]

Key technical development in Tuesday session was a clear break above the important sentiment 3100 mark.  This level was significant when the S&P fell below it last week.  Right now follow-through is the key.  A consecutive close above 3100 tomorrow will confirm Tuesday’s bullish reversal signal and setting the stage for a retest of the red band, currently at 3200-3350.

On the downside, 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 the low 2900s, based on the trend channel moving average.

Short-term trading range: 3000 to 3200.  S&P has a strong band of support between 3090 and 3070.  A failure to hold above 3070 has measured move to around 3000.  The index has resistance near 3200.  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, S&P cleared key resistance, breaking out above the important sentiment 3100 mark.  Consecutive close above 3100 this week would confirm Tuesday’s bullish reversal signal, supporting upside follow-through in the days ahead.  Our near-term work on momentum and price structure suggested that the path with least resistance remains higher as long as the S&P holds above 3000.

 

Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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