Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Thursday September 24, 2020.
Stocks fell sharply on Wednesday after data showing a cooling of U.S. business activity and the stalemate in Congress over more fiscal stimulus heightened concerns about the economy while the coronavirus pandemic remains unchecked. The Dow Jones Industrial Average fell 1.9 percent to 26,763.13. The S&P slid 2.4 percent to 3,236.92 and the Nasdaq Composite pulled back 3 percent to 10,632.99. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, jumped more than 6 percent to 28.58.
Energy, already the worst-performing sector this year, led the decline, compounding losses in the broader market despite U.S. oil prices ending positive on the day amid data showing crude inventories fell by a less-than-expected 1.639 million barrels last week. As such, the Energy Select Sector SPDR ETF (XLE) tumbled 4.52 percent on the day and is down about 50 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. XLE has been trending sharply lower after the late March recovery rally ran out of steam near the 38.2% Fibonacci retracement. The overall technical backdrop remains negative, suggesting that a retest of the March low, around 23, is inevitable. That level is too big and too important to fall quickly so it should not be surprising to see some short-term rebounds as short sellers take some money off the table.
XLE has resistance near 35. 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 17, 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”]
S&P sold off sharply after recent test of resistance at the trend channel moving average was met with a new wave of selling interest. Money Flow measure is on a verge of falling below the zero line, indicating an increase in selling pressure. Momentum indicator shifted lower from near oversold zone, indicating an internal weakness. These are negative developments, suggesting that the index might have to move to a much lower level to attract new buyers.
Right now, the most important thing to watch is trading behaviors as the 3200 zone is tested as support. A failure to hold above it, will bring the bottom of its short-term trading range, around 3100, into view.
Short-term trading range: 3100 to 3348. S&P has support around 3200. A failure to hold above that level has measured move to around 3100. Resistance is around 3348. A breakout above that level has measured move to around 3410.
Long-term trading range: 3100 to 3730. S&P has support near 3200. A failure to hold above that level has measured move to 3100-3000. The index has resistance near 3600. A close above that level has measured move to 3900.
In summary, S&P tested and failed at the trend channel moving average, the level that offered support since the index climbed above it in late April. When key supports broke it means that long-term buying pressure has finally been exhausted. The stronger the resistance level, the more powerful the selloff. Nevertheless, support is strong near the 3200 zone. This could help minimize downside follow-through and widespread breakdowns.
Thanks and happy trading.
(By：Michelle Mai for Capital Essence)
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