S&P’s 3300 Continues To Act As Price Magnet

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Tuesday August 4, 2020.

We’ve noted in the previous Market Outlook that: “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.”  As anticipated, stocks surged Monday as big tech continued to drive the broader market higher following bullish earnings last week, while healthcare names rallied on positive coronavirus treatment news.   The S&P gained 0.77 percent to 3,294.61.  The Dow Jones Industrial Average added 0.97 percent to 26,664.40. The Nasdaq Composite jumped 1.57 percent to 10,902.80.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell more than 1 percent to 24.28.

Oil markets began August trading on an ebullient note, rising 2% on encouraging U.S. manufacturing data and bets by market bulls that demand for crude will survive a rollback in output cuts by OPEC.  New York-traded West Texas Intermediate, the benchmark for U.S. crude futures, debuted August with its strongest performance in more than a week, settling up 74 cents, or 1.8%, at $41.01 per barrel.  As such, the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) rose 1.11 percent on the day but is down more than 45 percent YTD, underperformed the S&P.  Now the question is what’s next?  Below is an update look at a trade in XOP.

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 – SPDR S&P Oil & Gas Exploration & Production ETF (weekly)

Our “U.S. Market Trading Map” painted XOP bars in green (buy) – see area ‘A’ in the chart.  Over the past few weeks, XOP has been basing sideways using the early May breakout point as support.  This is a positive development, suggesting that the ETF could take another leg higher as soon as it works off overbought conditions.  A close above 54 on a weekly closing basis will confirm this and trigger acceleration toward the 68 zone, or the 1-year moving average.

XOP has support near 49.50.  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”]

The big picture remains the same. The S&P continues drifting higher after late July selloff found some solid footing near the lower boundary of the pink band.  This is a positive development but let’s notice that with Monday’s gains, the index is about 20 points below lower boundary of the red band, or extreme overbought zone.  Technically speaking, a trade above that level indicates extreme overbought conditions.  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.

Nevertheless, Money Flow measure is above the zero line, indicating a positive net demand for stocks.  This certainly would argue that the near-term risk remains to the upside.   With that said while more backing and filling would not be a surprise, if the S&P could hold above 3250 then a move above 3300 would be easier to be achieved.

Short-term trading range: 3220 to 3310.  S&P has support around 3250.  A failure to hold above that level has measured move to around 3220.  Resistance is at the lower boundary of the red band, around 3315.  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, although overbought condition is keeping buyers at bay, S&P’s 3300 continues to act as price magnet.  Short-term traders can anticipate increase short-term volatility with rapid up and down moves in the market.

 

Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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