S&P Broke Key Support but Follow-through is Key

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Monday June 22, 2020.

Stocks finished Friday lower, after swinging wildly throughout the session as investors assessed whether Apple’s decision to close some its U.S. stores in the midst of rising infections was a sign that parts of the U.S. could be forced to roll back the easing of some restrictions to curtail growing outbreaks.  The Dow Jones Industrial Average fell 0.8 percent to 25,871.46. The S&P gave up 0.5 percent to 3,097.92. The Nasdaq Composite finished the session just 3.07 points higher at 9,946.12.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, rose 6 percent to 35.12.

After hitting record highs intraday, Apple (AAPL) fell 1% as the tech giant announced it would again close 11 stores across the U.S. in Florida, North Carolina, South Carolina, and Arizona following a rise in coronavirus cases.  As such, the Technology Select Sector SPDR ETF (XLK) fell 0.7 percent on the day but is up more than 11 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 February massive selloff found support near the 69 zone, or the 38.2% Fibonacci retracement of the 2009-2020 major upswing and the 4-year moving average.  The March rally pushed the ETF above the prior high set in late February.  This is a positive development, setting the stage for a rapid advance toward the next level of resistance near the 126 zone, based on the 127.2% Fibonacci extension.  Consecutive close above 103 on a weekly closing basis will confirm this.

XLK has support near 95.  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”]

Key technical development in Friday session was a close below the important sentiment 3100 mark.  That level was significant when the S&P climbed above it earlier last week. Momentum indicator shifted lower from near overbought zone, indicating an internal weakness.  These elements could negatively affect trading sentiment in the coming days. Right now follow-through is the key.  We’d turn particular bearish if S&P closes twice below 3100.  As mentioned, a failure to hold above key price level, indicating more supply is coming into the market and a much deeper pullback should be expected and we’re looking at 2950, based on the trend channel moving average.

Short-term trading range: 3090 to 3155.  S&P has support near 3090.  A failure to hold above that level has measured move to around 2950.  The index has resistance near 3155.  A breakout above that level has measured move to around 3200.

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 broke key support Friday, signify a bearish breakout and downside reversal.  Nonetheless, the near-term technical backdrops remains bullish so it will be important to monitor the retreat and rebound behaviors to determine whether breakouts are decisive.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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