S&P In Orderly High-level Consolidation

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Friday October 2, 2020.

Stocks closed higher but off session highs Thursday amid rising fears U.S. lawmakers are unlikely to break the impasse on talks for further federal stimulus, though losses were stemmed by an ongoing rise in tech.  The Dow Jones Industrial Average added 0.1 percent to 27,816.90. The S&P rose 0.5 percent to 3,380.80, while the Nasdaq Composite outperformed, gaining 1.4 percent to 11,326.51.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, rose more than 1 percent to 26.67.

Tech pushed the broader market higher. Apple (AAPL) and Microsoft (MSFT) Alphabet (GOOGL) Amazon.com (AMZN) and Facebook (FB), which together make up a quarter weighting of the S&P, closed higher.  As such, the Technology Select Sector SPDR ETF (XLK) rose more than 1 percent on the day and is up more than 28 percent YTD, outperformed the S&P by a wide margin.  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 ETF (weekly)

Our “U.S. Market Trading Map” painted XLK bars in green (buy) – see area ‘A’ in the chart.  Over the past few weeks, XLK has been trending lower in a short-term corrective mode after the epic rally off the March ran into resistance at the 127.2% Fibonacci retracement.  The early September correction found support near the 109 zone.  This week’s bullish breakout above the September’s falling trend line, signify a bullish breakout and upside reversal.  This is a positive development, opened up for a retest of the September high, just below 130.

XLK has support near 109.  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”]

The big picture remains the same.  S&P continues basing sideways using the trend channel moving average as support.  Market internal has been strengthened following recent advance but upside momentum does not appeared strong enough to generate widespread breakout.  Over the next few days, traders should monitor trading behavior as the 3400 zone is tested as resistance.  That level was significant when the index fell below it in mid-September.  A sustain advance above that level will bring the early September high into view.

As for support, there is a strong band of support near the 3350 zone.  A failure to hold above that level will invalidate the bullish signal and a much deeper pullback should be expected.

Short-term trading range: 3320 to 3360.  S&P has support around 3350.  A failure to hold above that level has measured move to around 3220.  Resistance is around 3400.  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, the big picture remains the same.  There’s an orderly high-level consolidation period near the trend channel moving average, around S&P’s 3350, which represented the digestion period in the aftermath of the late September rally.  Market internal has been strengthened following recent advance but upside momentum does not appeared strong enough to generate widespread breakout.  S&P has 3400 to trade against.  We’d turn particularly bullish if the index closes twice above that level.

 

Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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