S&P Constrained by Short-term Sideways Trend

Editor’s note: this column was originally published on Capital Essence’s CEM News. It’s being republished as a bonus for the loyal readers. For more information about subscribing to CEM News, please click here.


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

Stocks fell Thursday as a slide in technology stocks overshadowed mostly bullish earnings at a time when rising U.S. Covid-19 cases shows no sign of letting up.  The Dow Jones Industrial Average dropped 0.5 percent to 26,734.71.  The S&P slid 0.3 percent to 3,215.57 and the Nasdaq Composite pulled back 0.7 percent to 10,473.83.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, rose less than 1 percent to 28.

Energy cut its gains on the day, as oil prices fell after OPEC and its allies agreed to rein in production cuts.  OPEC+ will reduce their cuts to 7.7 million barrels per day through December from the 9.7 million bpd cuts in place since May.  Brent crude fell 45 cents, or 1 percent, to $43.35 per barrel. West Texas Intermediate crude settled 45 cents, or 1.09 percent, lower at $40.75 per barrel.  As such, the Energy Select Sector SPDR ETF (XLE) fell 0.45 percent on the day and is down 38 percent 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 oversold bounce ran out of steam near the 38.2% Fibonacci retracement.  The June downswing is testing support at the early May breakout point, around 36.  That level is significant in charting terms.  a failure to hold above it on a weekly closing basis suggested that most buyers has already placed their bets and XLE will have to go to a much lower level to attract new buyers and we’re looking at the March low, just below 23.

XLE has resistance near 38.40.  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 July 14, 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”]

S&P continues basing sideway using the 3200 zone as support after recent rally attempt found resistance at the early June congestion zone.  Market internal has been deteriorated but downside momentum does not appear strong enough to generate widespread breakdowns.  Near-term, there is a high probability that a significant consolidation pattern will again develop around the 3230 zone.

For now, the early June congestion zone, around 3230, acted as strong resistance.  A close above it is required to neglect the short-term sideways trading pattern.  With that said, there is no reason to turn particularly bullish until this area is eclipsed.

On the downside, 3100 is the line in the sand.  That level was significant when the index climbed above it in late June.  When strong support is broken it means that near-term buying pressure has finally been exhausted.  With that said, a close below 3100 is outright bearish and a much deeper pullback should be expected and we’re looking at 3000-2900.

Short-term trading range: 3100 to 3230.  S&P has a strong band of support near 3100.  A failure to hold above that level has measured move to around 3000.  There is a strong band of resistance near 3230.  A breakout above that level has measured move to around 3300.

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, trading behavior in the S&P constrained by a short-term sideways pattern and shown little evidence of a sustainable change in trend.  For now, 3230 is the line in the sand.  There is a no reason to turn particularly bearish until this area is taking out.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

© All rights reserved and actively enforced.
Note: This is a free edition of The Market Outlook, a daily CEM News subscriber newsletter. To get this column before market opens together with hundreds of technical trading ideas (including stocks and ETFs) every month, please click here.
Subscribe to CEM News to receive more in-depth research from Capital Essence.v