S&P Held Support But Follow-through Is The Key

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Friday October 30, 2020.

We’ve noted in the previous Market Outlook that: “Wednesday’s bearish break below the important sentiment 3300 mark on the S&P suggested that bottoming process will take more time and probably inflict more damage to stocks.  While there seems to be room to go lower, the selloff is overextended so it should not be surprised to see at least an attempt to rally in the coming days.”  As anticipated, stocks recovered from a rocky start to end higher Thursday led by a rebound in technology from a rout a day earlier ahead of earnings from key players.  The S&P climbed 1.2 percent to 3,310.11 and the Nasdaq Composite advanced 1.6 percent to 11,185.59. The Dow Jones Industrial Average added 0.5 percent to 26,659.11.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell more than 6 percent to 37.59.

Netflix (NFLX) cut losses to end up 4 percent higher after the streaming giant announced that it would raise the price for its standard and premium plans in the U.S.  Facebook (FB) closed 5% higher as investors bet the social media giant is set to report a solid quarter of earnings following impressive quarterly results from its social media peers including Snap (SNAP) and Pinterest.  As such, the Technology Select Sector SPDR Fund (XLK) rose 1.67 percent on the day and is up about 24 percent YTD, outperformed the S&P.  Now the question is what’s next?  Below is an update look at a trade in XLK.

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 – Technology Select Sector SPDR Fund (weekly)

Our “U.S. Market Trading Map” painted XLK bars in red (sell) – see area ‘A’ in the chart.  Over the past few weeks, XLK has been trending lower in a short-term corrective mode after the late September rally ran out of steam just above the prior high set in early September. This week’s massive selloff is testing support at the 2020 rising trend line, around 112.  That level was tested several times over the past months.  If XLK could hold above it then a retest of the September high, just below 128, would be easier to achieve.

XLK has support around 112.  A failure to hold above that level will bring the early 2020 high, around 103, into view.  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 October 26, 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 rebounded nicely off support at the lower boundary of the green band, a key technical level, just above the important sentiment 3200 mark. Money Flow measure climbed above the zero line, indicating a positive net demand for stocks. Momentum indicator shifted higher from near oversold zone, allowing additional upside probing.  Right now, the most important thing to watch is trading behavior as the 3370 and 3400 zone is tested as resistance.  There is no reason to turn particularly bullish until this zone is eclipsed.

With that said, if the market is going to find bottom in the near term, we want to see the S&P establishes some trading ranges and climbs above 3400.  Staying below that level heralds more losses.

Short-term trading range: 3260 to 3500.  S&P has support around 3260.  A failure to hold above that level has measured move to around 3130.  Resistance is around 3370-3400.  A sustain advance above that level has measured move to 3500.

Long-term trading range: 3150 to 3730.  S&P has support near 3350.  A failure to hold above that level has measured move to 3150.  The index has resistance near 3600.  A close above that level has measured move to 3900.

In summary, S&P tested and held support at the lower boundary of the green band.  While Thursday’s rally had improved the posture of our short-term indicators, which supportive of further upside probing, follow-through is the key.  S&P has 3400 to trade against.  There is no reason to turn particularly bullish until this zone is eclipsed.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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