S&P Will Break To New High As Soon As Market Shakes Off Excessive Optimism

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Monday July 20, 2020.

We’ve noted in the previous Market Outlook that: “trading behavior in the S&P constrained by a short-term sideways pattern and shown little evidence of a sustainable change in trend.”  As anticipated, stocks closed Friday mostly along the flatline as investors weighed the prospect of more fiscal stimulus against fears of further business disruptions due to a record rise in COVID-19 cases.  The S&P gained 0.3 percent to 3,224.73. The Nasdaq Composite added 0.3 percent to 10,503.19.  The Dow Jones Industrial Average fell 0.2 percent to 26,671.95.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell more than 8 percent to 25.68.

Tech stocks were under selling pressure after Netflix (NFLX) reported second-quarter earnings that missed analyst expectations, pushing the stock down 6.5 percent.   The company’s weak guidance for third-quarter subscriber growth — a key metric for the streaming giant — also contributed to the steep sell-off in the stock.  As such, the Technology Select Sector SPDR ETF (XLK) fell 0.49 percent on the day but is up more than 16 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 selloff found some solid footing near the 68 zone, or the 38.2% Fibonacci retracement.  The March rally pushed the ETF above the prior high set in February, signify a bullish breakout and upside reversal.  The early July rally tested resistance at the 110 zone.  Last week’s bearish trading action suggested that the resistance would hold.  This is a short-term negative development, increased the probability for a retest of support near the 100 zone.  That level is significant in charting terms.  It must hold on a weekly closing basis to prevent a test of the 90-80 zone.

A sustain breakout above 110 would trigger acceleration toward the 126 zone, or the 127.2% Fibonacci extension.

XLK has support near 100.  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”]

The big picture remains the same.  S&P continues basing sideways near resistance at the early June congestion zone.  Money Flow measure is above the zero line, indicating a positive net demand for stocks.  This is a bullish development, suggesting that the index will take a new leg higher as soon as it works off excessive optimism.

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, the big picture remains the same.  There’s an orderly high-level consolidation period near the early June congestion zone, around S&P’s 3230, which represented the digestion period in the aftermath of the late June rally.  The fact that the index managed to hold on to most of recent gains despite overbought conditions, indicating an internal strength.  This increases the probability that the S&P will break out to new highs as soon as the market shakes off the excessive bullishness.

 

Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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