S&P Overbought But Momentum Remains Supportive

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Thursday September 3, 2020.

We’ve noted in the previous Market Outlook that: “while overbought condition is likely keeping buyers at bay, the overall technical backdrop remains supportive of further advance.  As for strategy, pullback will present a buying opportunity, while selling into strength may not be the best strategy in a market considered likely to bounce back.”  As anticipated, equity market closed higher Wednesday as investors drew hope from progress in the development of tests and vaccines for COVID-19.  Leading infectious disease health expert Dr. Anthony Fauci told NBC’s “Today” show that a COVID-19 pandemic cure could come by the end of 2020, if the roster of companies attempting to achieve a vaccine are able to produce outstanding preliminary results.  For the day, the Dow Jones Industrial Average surged 1.6 percent to 29,100.50.  The S&P climbed 1.5 percent to 3,580.84. The Nasdaq Composite Index advanced 0.97 percent to 12,056.44.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, rose more than 1 percent to 26.57.

Defensive sectors were in favor, with utilities and Consumer staples leading to the upside thanks to a 4 percent gain in Coca-Cola (KO) and 10 percent jump in whiskey maker Brown Forman (BF-B).  As such, the Consumer Staples Select Sector SPDR ETF (XLP) rose 1.81 percent on the day and is up more than 6 percent YTD, slightly underperformed the S&P.  Now the question is what’s next?  Below is an update look at a trade in XLP.

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 – Consumer Staples Select Sector SPDR ETF (weekly)

Our “U.S. Market Trading Map” painted XLP bars in green (buy) – see area ‘A’ in the chart. XLP has been on a tear in recent days after breaking out above the prior high in late August. This week’s upside follow-through confirmed last week’s bullish signal.  The overall technical backdrop remains positive of further advance.  Consecutive close above 65 will confirm this and trigger acceleration toward the 77 zone, or the 127.2% Fibonacci extension.

XLP has support near 65.  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 Wednesday session was a clear break above the lower boundary of the red band, or extreme overbought zone.  That level was tested several times over the past months.  As mentioned, 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 the coming days.

S&P has support near 3500. The overall trend and 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: 3520 to 3620.  S&P has support around 3520.  A failure to hold above that level has measured move to around 3460-3420.  Resistance is around 3620.  A breakout above that level has measured move to around 3680.

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 3600.  A close above that level has measured move to 3900.

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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