S&P Pressured By Short-term Negative Momentum

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Friday September 11, 2020.

We’ve noted in the previous Market Outlook that: “our near-term work on price structure and momentum suggested that the S&P is in a midst of a short-term oversold bounce. The bulls must hurdle and sustain above 3430 or market will work off oversold conditions and fall under its own weight.”  As anticipated, S&P moved higher in early Thursday session, traded as high as 3,425 before gave up early-day gains and signs of a slowdown in the labor market raised concerns about the strength of the recovery at a time when Congressional efforts to make progress on a coronavirus stimulus package failed to win enough votes to proceed. For the day, the bench mark gauge slid 1.8 percent to 3,339.19. The Nasdaq Composite dropped 2 percent to 10,919.59.  The Dow Jones Industrial Average fell 1.45 percent to 27,534.58.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, rose more than 3 percent to 29.84.

Energy also led the pace downward, falling 3 percent as oil prices slipped after U.S. crude inventories unexpectedly rose last week, renewing worries about the strength of crude demand.  As such, the Energy Select Sector SPDR ETF (XLE) tumbled 3.67 percent on the day and is down about 46 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.  The first dominant feature on the chart is the falling trend starting in early 2020.  The second dominant feature of the chart is the sideways trading range between the 39.50 and 34 since late June, which represents the digestion period.  Technically speaking, the fact that XLE bounced back and forth within an increasing tight trading band as it works off oversold conditions indicating an internal weakness. This week’s selloff pushed the ETF below the lower boundary of its 2-month trading range, signify a bearish breakout. A consecutive close below 34 on a weekly closing basis will confirm this and a retest of the March low, around 23, should be expected.

XLE has resistance near 36.  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 bearish (sell).  Last changed September 3, 2020 from bullish (buy) – (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 moved down to test support at the trend channel moving average after the early rally attempt ran out of steam near the lower boundary of the pink.  Momentum indicator has been weakening but downward momentum does not appeared strong enough to generate a widespread breakdown.  The index could signal a downward trajectory, depending on how it closes over the next few days.  The trend channel moving average, just above the important sentiment 3300 mark, represents key support.  If it closes below that level, the next leg is likely lower, and we’re looking at 3250-3150.

Short-term trading range: 3300 to 3500.  S&P has support around 3300.  A failure to hold above that level has measured move to around 3250-3150.  Resistance is around 3430-3460.  A breakout above that level has measured move to around 3500.

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, S&P will have a downward bias this week, pressured by short-term negative momentum but we expect support at the trend channel moving average to remain largely intact.  There is a high probability that market is in for a ‘range-bound’ trading environment.  This is a rally and retreat environment. It is not a trending environment. Short-term traders can anticipate continued volatility with rapid up and down moves in the markets.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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