Buying Short-term Market 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 Monday August 3, 2020.

We’ve noted in the previous Market Outlook that: “Thursday’s impressive intraday bullish reversal suggesting that the bulls are still in control of the market.  However, given the looming resistance near the 3300 zone on the S&P, there is no big commitment to accumulate stocks aggressively at this point.  What this means is that as the S&P inches into the area of key overhead resistance, aggressive sellers will most likely dips in their toes to see how the market reacts.”  As anticipated, equity market staged a late-afternoon rally on Friday as investors shrugged off concerns about rising coronavirus cases across the U.S. to focus on Big Tech stocks.  For the day, the Dow Jones Industrial Average rose 0.4 percent to 26,428.32. The S&P 500 climbed 0.7 percent to 3,271.12, while the Nasdaq Composite gained 1.4 percent to 10,745.27.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell more than 1 percent to 24.46.

Energy stocks got hit hard Friday after Chevron Corp (CVX) reported an $8.3 billion loss on asset writedowns and ExxonMobil (XOM) Corp recorded a second consecutive quarterly loss.  As such, the Energy Select Sector SPDR ETF (XLE) fell 0.47 percent on the day and is down about 40 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 basing sideways using the early May breakout point as support.  The fact that XLE is struggled to get far past the 38.30 zone is a short-term negative development, suggesting that the ETF might have to move to a much lower level to attract new buyers.  Over the next few days, traders should monitor trading behaviors near the 34 zone.  A close below that level on a weekly closing basis will trigger a new downswing with near-term target around 23, or the March low.

XLE has resistance near 38.30.  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 29, 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, S&P rebounded nicely after the early selloff attempt found some solid footing near the lower boundary of the pink band.  As it was the case of late, Friday trading actions exhibited panic-like-buying behavior, the index sold off sharply as uncertainty over the government’s next coronavirus aid exacerbated economic worries related to the pandemic, came off its intraday low and closed around where it opened.  At 3271, the S&P was more than 1 percent off its intraday low of 3220.  This is a bullish development, suggesting that the path with least resistance remains to the upside. Perhaps the positive Money Flow measure is the best illustration of the bull’s case.

Traders however, must be mindful that at 3271, the S&P is about 1 percent below the lower boundary of the red band, or extreme overbought zone.  The normal behavior for the S&P has been to consolidate and retreated almost every time it traded above that level so there is a high probability that a significant consolidation pattern will again develop in this area.  With this in mind, we’d look to reduce exposure into overbought strength, which might take the S&P closer to 3300, based on the lower boundary of the red band, before a significant pullback unfolds.

For now, the bulls will continue to have the benefit of the doubts as long as the S&P holds above 3200.  A close below that level signals a medium-term correction with target around 3100.

Short-term trading range: 3200 to 3310.  S&P has support around 3220.  A failure to hold above that level has measured move to around 3140.  Resistance is at the lower boundary of the red band, just above 3310.  A breakout above that level has measured move to around 3375.

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, overbought conditions have returned on a daily basis but momentum remains supportive so downside risk could be limited. It is possible that S&P could continue to drift higher as trading sentiment remains strong.  As for strategy, buying into short-term market dips remains the most profitable strategy.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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