S&P Resumed Multi-month Upward Trend

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Tuesday October 6, 2020.

Stocks closed higher Monday as investors cheered news that U.S. President Donald Trump will be discharged from the hospital Monday evening, easing concerns about more political uncertainty ahead of Election Day. The Dow Jones Industrial Average climbed 1.7 percent to 28,148.64. The S&P rose 1.8 percent to 3,408.62, while the Nasdaq Composite gained 2.3 percent to 11,332.49.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, rose more than 1 percent to 28.08.

Healthcare climbed after the U.S. president’s doctors confirmed Trump had received experimental Covid-19 treatments developed by both Regeneron Pharmaceuticals (REGN) and Gilead Sciences (GILD), sending shares up 7 percent and 2 percent, respectively.  As such, the Health Care Select Sector SPDR ETF (XLV) jumped more than 2 percent on the day and is up about 5 percent YTD, slightly underperformed the S&P.  Now the question is what’s next?  Below is an update look at a trade in XLV.

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 – Health Care Select Sector SPDR ETF (weekly)

Our “U.S. Market Trading Map” painted XLV bars in green (buy) – see area ‘A’ in the chart.  Over the past few weeks, XLV has been basing sideways using the prior high set in early 2020 as support.  The overall technical bias remains positive, suggesting that the ETF will take a leg higher as soon as it works off overbought conditions.  Right now, the most important thing to watch is trading behavior as the 110 zone is tested as resistance.  A sustain advance above that level will trigger acceleration toward the 130 zone, or the 127.2% Fibonacci extension.

As for support, there is a strong band of support near 100.  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”]

Once again, the S&P climbed above the trend channel moving average after recent pullback found support near the upper boundary of the green band.  Momentum indicator shifted higher from near above the oversold zone, allowing additional upside probing.  Nonetheless, Money Flow measure is flashing a weak bullish signal as it hovers near the zero line, indicating a lack of commitment among the bulls.  This might put a cap on the upside.

Over the next few days, traders should monitor the rally and retreat behaviors as the 3400 zone is penetrated.  A sustain advance above that level signify a bullish breakout and retest of the September high, just below 3600, should be expected.

On the downside, S&P has 3365 to trade against. A close below that level will invalidate the bullish signal.

Short-term trading range: 3320 to 3360.  S&P has support around 3365.  A failure to hold above that level has measured move to around 3230.  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 climbed above the trend channel moving average Monday, signify resumption of the multi-month upward trend.  Nevertheless, it will be important to monitor the rally and retreat behaviors over the next few days to determine whether breakouts are decisive.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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