Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Wednesday October 7, 2020.
Stocks fell on Tuesday after Donald Trump rejected U.S. House Speaker Pelosi’s $2.4 trillion coronavirus stimulus proposal, instructing his representatives to halt talks until after the election, sparking a sharp reversal in the major market benchmarks. The Dow Jones Industrial Average fell 1.3 percent to 27,772.76. The S&P ended the day down 1.4 percent to 3,360.95. The Nasdaq Composite dropped 1.6 percent to 11,154.60. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, jumped more than 5 percent to 29.53.
Value stocks — those linked to the strength of the economy like financials, industrials, and materials — fell into the red, dragging the broader market down. Industrials were also held back by a fall in Boeing (BA) after the aircraft maker cut its forecast for demand and warned it could take more than a decade to recover from the Covid-19 pandemic. The aircraft maker forecasts demand for 18,350 commercial airplanes in the next decade, down 11% from its 2019 projection. As such, the Industrial Select Sector SPDR ETF (XLI) fell 1.22 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. XLI moved up to test resistance at the early 2020 breakdown point after the mid-September selloff found support near the 2-year moving average. The over technical backdrop remains positive, suggesting that XLI might take a new leg higher as soon as it works off excessive optimism. Right now the most important to watch is trading behavior near the 80 zone. A close above that level on a weekly closing basis will trigger acceleration toward the early 2020 high, just above 85.
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 shifted to bearish (sell). Last changed October 6, 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”]
Once again, S&P sold off sharply after the rally attempt ran out of steam near the lower boundary of the pink band. The late day selloff pushed the index below the trend channel moving average. That level was tested several times over the past weeks. In accordance to the Japanese candlestick pattern recognition, Tuesday’s bearish engulfing candlestick is a clear indication of supply overwhelming demand. The market is no longer oversold following recent rally, making further advance unlikely. Right now follow-through is the key. A consecutive close below the trend channel moving average, currently at 3367, will confirm Tuesday’s bearish signal. That, if and when happens, could trigger a torrent of selling that should at least retest the September low, around 3200.
On the upside, S&P has 3430 to trade against. A sustain advance above that level will bring the 3600 into view.
Short-term trading range: 3240 to 3360. S&P has minor support around 3340. A failure to hold above that level has measured move to around 3240. 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, Tuesday’s bearish engulfing bar suggesting that the oversold relief rally might have run its course. Right now, follow-through is the key. We’d turn particular bearish if the S&P closes twice below the trend channel moving average. A break below that level has a measured move to 3200.
Thanks and happy trading.
(By：Michelle Mai for Capital Essence)
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