S&P Might Pare Back And Consolidate Before Heading Higher

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Monday August 31, 2020.

The S&P and NASDAQ notched record highs Friday, as tech continued its march higher in the wake of data pointing to underlying strength in the U.S. consumer.  Consumer spending rose by 1.9% in the month of July, according to the Commerce Department, topping economists’ forecast for a 1.5% increase.  For the day, the S&P gained 0.7 percent to 3,508.01. It was the index’s first-ever close above 3,500. The Nasdaq Composite advanced 0.6 percent to 11,695.63.  The Dow Jones Industrial Average climbed 0.6 percent to 28,653.87.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell more than 6 percent to 22.96.

Big tech also supported the broader move higher as the Fab 5 racked up gains.  Amazon (AMZN), Alphabet (GOOGL), Apple (AAPL), and Microsoft (MSFT) and Facebook (FB), which make up about the quarter of the S&P, closed higher.  As such, the Technology Select Sector SPDR ETF (XLK) rose 0.88 percent on the day and is up more than 34 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 days after breakout above the February high in early July.  The overall technical backdrop remains supportive of further advance. So it seems to us that this rally could take XLK closer to the 127.2% Fibonacci extension, just below 128, before a significant pullback unfolds.

XLK has support near 110.  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 August 20, 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 above the important sentiment 3500 mark.  This is a positive development but let’s notice that the rally has created overbought conditions, the S&P has traded above the lower boundary of the red band for three consecutive sessions.  Technically speaking, the normal behavior for the S&P has been to consolidate and retreated almost every time it traded above that level, the way we had in June, so there is a high probability that a significant consolidation pattern will again develop in this area.

While seemingly vulnerable to short-term weakness, the overall trend and the Money Flow measure continue favor the bulls so we believe that any dips are a buying opportunities rather than time to take profits and get out.

Short-term trading range: 3430 to 3530.  S&P has support around 3470.  A failure to hold above that level has measured move to around 3430-3400.  Resistance is around 3500-3530.  A breakout above that level has measured move to around 3600.

Long-term trading range: 3100 to 3730.  S&P has support near 3300.  A failure to hold above that level has measured move to 3100.  The index has resistance near 3520.  A close above that level has measured move to 3730.

In summary, the fact that market is overbought as S&P poked its head into the level that had been successful in repelling price action in the past suggesting that the market is likely to pare back and consolidate before heading higher again.  So, we would look to increase upside exposure on market dips rather than chasing breakouts.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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