S&P Selloff Could Be Shallow And Quick

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Thursday June 18, 2020.

Wall Street closed mixed Wednesday as investors weighed up optimism over an economic recovery against an ongoing rise in infections across parts of the U.S. that threatened to slow the pace of economic reopening.  A rise in infections in some states, including Arizona, Florida, and Texas, put travel and tourism stocks on the backfoot as concerns mount that lawmakers may move to roll back the relaxation of some restrictions.  The Dow Jones Industrial Average fell 0.7 percent to 26,119.61. The S&P dipped 0.4 percent to 3,113.49.  The tech-heavy Nasdaq Composite outperformed, rising 0.15 percent to 9,910.53.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell less than 1 percent to 33.47.

Energy was among the biggest decliners as renewed concerns about crude demand were exacerbated by a surprise build in weekly crude supplies.  Weekly U.S. crude supplies climbed by 1.2 million barrels last week, confounding expectations for a draw of 152,000 barrels.  As such, the Energy Select Sector SPDR ETF (XLE) fell 3.41 percent on the day and is down about 34percent 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. Over the past few weeks, XLE has been trending lower after the late March rally ran out of steam near the 38.2% Fibonacci retracement of the 2018-2020 downswing.  This week’s downside follow-through confirmed last week’s bearish reversal signal. This is a negative development, increased the probability for a retest of the March low, around 23.  A close below 36 on a weekly closing basis will confirm this.

XLE has resistance near 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 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”]

After falling nearly 300 points from the early June high of 3233 and met highly anticipated support at the 3000 zone, last week’s recovery rally pushed the S&P above the closely watch 3100 mark.  Wednesday’s selloff retested support at the 3100 zone.  That level is significant in charting terms.  A failure to hold above it, indicating more supply is coming into the market and a much deeper pullback should be expected.  So, it will be important to monitor the retreat and rebound behaviors over the next few days to determine whether breakdowns are decisive.

Short-term trading range: 3000 to 3200.  S&P has support near 3100.  A failure to hold above that level 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, market is in holding pattern as traders are watching to see whether or not the S&P can hold above 3100.  Market internal remains supportive, suggesting that selloff could be shallow and quick as sideline money will try to fight its way back into the market.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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