S&P In Confirmed Downleg

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Thursday June 25, 2020.

We’ve noted in the previous Market Outlook that: “S&P rally attempt failed at formidable resistance.  There is a higher than average odds that the late day selloff will momentum.”  As anticipated, stocks fell sharply on Wednesday as rising Covid-19 infections sparked concerns that some U.S. states could be forced to unwind or slow measures to reopen businesses, threatening the pace of the economic recovery.  The Dow Jones Industrial Average dropped 2.7 percent to 25,445.94. The S&P fell 2.6 percent to 3,050.33 while the Nasdaq Composite slid 2.2 percent to 9,909.17.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, rose about 8 percent to 33.84.

The reopening trade – bullish bets on stocks tied to the progress of the economic reopening – was shunned, with travel and tourism stocks down sharply.  American Airlines (AAL) fell 7.1 percent, Wynn Resorts (WYNN) was down 11 percent, and Carnival (CCL) also slumped 11 percent.  As such, the iShares Transportation Average ETF (IYT) fell 3.17 percent on the day and is down nearly 20 percent YTD, underperformed the S&P.  Now the question is what’s next?  Below is an update look at a trade in IYT.

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 – iShares Transportation Average ETF (weekly)

Our “U.S. Market Trading Map” painted IYT bars in red (sell) – see area ‘A’ in the chart.  Over the past few weeks, IYT has been basing sideways using the 155 zone, or the late May breakout point as support after the March rally ran into the massive 2-conjoining resistance near the 178 zone.  That level was significant when the ETF fell below it in February.  This week’s bearish trading action suggested that the support might not hold for long.  Right now the most important thing to watch is trading behavior near 154.  A close below that level on a weekly closing basis signify a bearish breakout and downside reversal and a retest of the March low, around 116, should be expected.

IYT has resistance near 178.  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 bearish (sell).  Last changed June 24, 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”]

Key technical development in Wednesday session was a close below the important sentiment 3100 mark.  That level was tested several times over the past weeks.  This is negative development, signify a bearish breakout and downside reversal.  While seemingly vulnerable to further short-term weakness, Money Flow measure still hovers above the zero line, indicating a positive net demand for stocks.  Additionally, support is strong between the important sentiment 3000 mark and the trend channel moving average, currently at 2970.  These elements could help minimize downside follow-through and widespread breakdowns.

Short-term trading range: 2970 to 3155.  S&P has a strong band of support between 3000 and 2970.  A failure to hold above that level has measured move to around 2900.  The index has resistance near 3100.  A breakout above that level has measured move to around 3180.

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, Wednesday’s downside follow-through confirmed Tuesday’s bearish signal.  While seemingly vulnerable to further short-term weakness, support is strong between the important sentiment 3000 mark and the trend channel moving average, currently at 2970. That zone is too big and too important to fall quickly.  It could help minimize downside follow-through and widespread breakdowns.

 

Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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