S&P In Early Stage Of Short-term Oversold Bounce

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Tuesday September 29, 2020.

Stocks closed sharply higher Monday, helped by a strong showing for the banks and technology after House Speaker Nancy Pelosi renewed investor hopes for a further coronavirus stimulus.  For the day, the Dow Jones Industrial Average added 1.5 percent to 27,584.06. The S&P gained 1.6 percent to 3,351.60 and the Nasdaq Composite climbed 1.9 percent to 11,117.53.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell less than 1 percent to 26.19.

Airlines rallied sharply, lifting industrials higher, with Delta Air Lines (DAL) and United Airlines (UAL), up more than 5 percent. United Airlines also received a boost after the carrier said its pilots agreed to reduce their working hours to avoid furloughs that were set to begin in October. As such, the Industrial Select Sector SPDR ETF (XLI) jumped 1.80 percent on the day and is down more than 4 percent YTD, underperformed the S&P.  Now the question is what’s next?  Below is an update look at a trade in XLI.

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 – Industrial Select Sector SPDR ETF (weekly)

Our “U.S. Market Trading Map” painted XLI bars in green (buy) – see area ‘A’ in the chart.  Over the past few weeks, XLI has been trending lower in a short-term corrective mode after the late March rally ran out of steam near the early 2020 breakdown point.  The correction found some solid footing near the 2-year moving average, a key technical level based on moving averages.  This is a positive development, opened up for a retest of the February high, just above 85.  A close above 80 on a weekly closing basis will confirm this.

XLI has support near 74.  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 September 25, 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, the S&P moved up to test resistance at the trend channel moving averages after last week’s selloff found support near the upper boundary of the green band. Momentum indicator shifted higher from near oversold zone, suggesting further short-term gains likely.  Money Flow measure hovers near the zero line, indicated a lag of commitment among the bulls.  If the market is going to find a bottom in the near term, we want to see the S&P closed twice above the trend channel moving average, currently at 3353. Stay below that level heralds more losses.

S&P has minor support near 3320. A close below that level will invalidate Monday’s bullish signal and a much deeper pullback should be expected.

Short-term trading range: 3200 to 3350.  S&P has support around 3320.  A failure to hold above that level has measured move to around 3200.  Resistance is around 3370.  A breakout above that level has measured move to around 3400.

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, our near-term work on price structure and momentum suggested that the S&P is in an early stage of a short-term oversold bounce.  A consecutive closes above the trend channel moving average will confirm this.

 

Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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