Buy the Dips Remains the Most Profitable Strategy

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Tuesday June 23, 2020.

We’ve noted in the previous Market Outlook that: “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.”  As anticipated, stocks traded lower in early Monday session amid worried about an increase in coronavirus cases in the United States and other countries.  The market however, managed to overcome the early weakness as strength in large-cap tech stocks led the way higher on Wall Street.  The Dow Jones Industrial Average gained 0.6 percent to 26,024.96. The Nasdaq Composite posted a record closing high, advancing 1.1 percent to 10,056.47. The S&P rose 0.7 percent to 3,117.86.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell nearly 10 percent to 31.77.

Retail names, which are directly linked to the economic reopening, were also among the biggest gainers. Shares of Gap were higher by 8.3 percent, boosted by an upgrade at Wells Fargo, citing the retailer’s “under-appreciated value and optionality.” Walmart gained more than 1 percent after an upgrade by UBS.  As such, the SPDR S&P Retail ETF (XRT) jumped 2.24 percent on the day but is down more than 6 percent YTD, 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 March’s massive rally ran into resistance at the 2018 falling trend line. This week’s bullish reversal suggested that the support would hold and opened up for a retest of the 45 zone.  A close above that level on a weekly closing basis signify an upside breakout and setting the stage for a retest of the all-time high set in 2018, near 53.

XRT has support just below 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 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”]

Once again, the S&P climbed above the important sentiment 3100 mark after falling below that level last week.  Market internal has been strengthened but upside momentum does not appeared strong enough to generate widespread breakouts.  So it should not be surprising to see some backings and fillings in the coming days.

In a longer term, the overall technical backdrop remains positive.  If the S&P could hold above 3100 then a move to the all-time high set in early 2020, just below 3400, would be easier to achieve.

As for support, 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: 3100 to 3155.  S&P has support near 3100.  A failure to hold above that level has measured move to around 3000.  The index has resistance near 3180.  A breakout above that level has measured move to around 3220.

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, there is an orderly consolidation, which represents digestion period.  The overall technical backdrop remains positive suggesting downside risk could be limited.  As for strategy, pullback will present a buying opportunity, while selling into strength may not be the best strategy in a market considered likely to bounce back.

 

Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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