S&P Climbed Above Key Level 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 Thursday October 1, 2020.

Stocks closed higher but off intraday high amid uncertainty over further stimulus after U.S. lawmakers failed to reach an agreement on a deal but pledged to continue talks.  U.S. Treasury Secretary Steven Mnuchin touted progress on stimulus talks, though said he had yet to reach an agreement with House Speaker Nancy Pelosi on a coronavirus aid package. The House expected to vote on the $2.2 trillion package on Wednesday.  Ahead of his meeting with Pelosi, Mnuchin told CNBC he was “hopeful” about getting a deal done.  For the day, the Dow Jones Industrial Average added 1.2 percent to 27,781.70. The S&P rose 0.8 percent to 3,363.00, while the tech-heavy Nasdaq Composite climbed 0.7 percent to 11,167.51.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, rose less than 1 percent to 26.37.

The housing market remained robust as the National Association of Realtors survey showed pending home sales increased a record pace of 8.8 percent last month.  Homebuilders were sharply higher following the survey, with SPDR® S&P Homebuilders ETF (XHB) up more than 1 percent, led by Lennar (LEN), up more than 3 percent. Now the question is what’s next?  Below is an update look at a trade in XHB.

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 – SPDR® S&P Homebuilders ETF (weekly)

Our “U.S. Market Trading Map” painted XHB bars in green (buy) – see area ‘A’ in the chart.  Over the past few weeks, XHB has been basing sideways using the prior breakout point as support.  The overall technical backdrop remains positive, suggesting that the ETF will take a new leg higher as soon as it works off excessive optimism.  A close above 55 on a weekly closing basis signify a bullish breakout and trigger acceleration toward the next level of resistance at the 127.2% Fibonacci extension, just above 60.

XHB has support near 49.  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”]

Key technical development in Wednesday trading session was a close above the trend channel moving average. That level was significant when the index fell below it in in mid-September.  Momentum indicator shifted higher from near oversold zone, allowing additional upside probing.  Money Flow measure is flashing a weak bullish signal as it hovers near the zero line, indicating a weak net demand for stocks.  Right now follow-through is the key.  We’d turn particular bullish if S&P closes twice above the trend channel moving average, around 3360.

Short-term trading range: 3320 to 3360.  S&P has support around 3320.  A failure to hold above that level has measured move to around 3220.  Resistance is around 3430.  A breakout above that level has measured move to around 3600.

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 broke out above key resistance Wednesday, signify resumption of the multi-month uptrend that has been in place since late March.  While the near-term technical backdrops favors further upside probing, it will be important to monitor the rally and retreat behaviors to determine whether breakouts are decisive.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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