S&P Could Continue To Drift Higher As Sentiment Remains Strong

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Friday August 7, 2020.

We’ve noted in the previous Market Outlook that: “S&P has confirmed a breakout above key resistance in a reflection of improved momentums.  Market internals remain supportive of further upside follow-through. Nonetheless, we expect near-term gains to be limited by overbought conditions. While some backing and filling would not be a surprise, the bulls will continue to have the benefit of the doubts as long as S&P holds above 3240.”  As anticipated, S&P traded slightly lower in early Thursday session before the late-day rally pushed the bench mark gauge to multi-month high, up 0.6 percent to 3,349.16.  The Dow Jones Industrial Average rose 0.7 percent to 27,386.98.  The Nasdaq Composite Index gained 1 percent to 11,108.07.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell 1 percent to 22.65.

Airline and airline-related stocks o received a boost Thursday afternoon, after the State Department, in coordination with the Centers for Disease Control and Prevention, said it was lifting its global advisory against international travel for Americans that has been in place since March because of the COVID-19 pandemic.  As such, the U.S. Global Jets ETF (JETS) jumped 2.2 percent on the day but is down more than 47 percent YTD, underperformed the S&P.  Now the question is what’s next?  Below is an update look at a trade in JETS.

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 – U.S. Global Jets ETF (weekly)

Our “U.S. Market Trading Map” painted IYT bars in green (buy) – see area ‘A’ in the chart.  Over the past few weeks, JETS has been basing sideways using the late May breakout point as support after the oversold bounce ran out of steam near the 50% Fibonacci retracement.  This week’s bullish reversal suggested that an important near-term low has been established and JETS is in an early stage of a new upswing that projects to 20, or the 38.2% Fibonacci retracement.  A sustain advance above that level has measured move to around 23, or the 50% Fibonacci retracement.

JETS has support just above 15.  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”]

As expected, S&P continues drifting higher after breaking out above the important sentiment 3300 earlier this week.  This week’s rally pushed the index above the lower boundary of the red band.  As mentioned, the red zone indicated 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, momentum remains supportive over the short to medium term and Money Flow measure is above the zero line, indicating a positive net demand for stocks.  This certainly would argue that the path with least resistance remains to the upside.

Near-term, while some backing and filling would not be a surprise, the bulls will continue to have the benefit of the doubts as long as S&P holds above 3300.

Short-term trading range: 3300 to 3400.  S&P has support around 3300.  A failure to hold above that level has measured move to around 3250.  Resistance is around 3380.  A breakout above that level has measured move to around 3400-3430.

Long-term trading range: 3100 to 3600.  S&P has support near 3100.  A failure to hold above that level has measured move to 2700.  The index has resistance near 3450.  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 dips remains the most profitable strategy.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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