S&P Could Continue To Drift Higher As Sentiment Remains Strong

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Monday October 12, 2020.

Stocks rose on Friday to end their best week in months as U.S. President Donald Trump signaled support for a bigger coronavirus aid package. The Dow Jones Industrial Average rose 0.6 percent to 28,586.90. The S&P gained 0.9 percent to 3,477.13. The Nasdaq Composite advanced 1.4 percent to 11,579.94.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell more than 5 percent to 25.

Microsoft and Salesforce led the tech space higher, rising 2.5 percent and 2.2 percent, respectively. Consumer discretionary and tech were the best-performing S&P sectors, advancing more than 1 percent each.  As such, the Technology Select Sector SPDR Fund (XLK) rose 1.53 percent on the day and is up more than 31 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 green (buy) – see area ‘A’ in the chart.  Over the past few weeks, XLK has been trending higher after the early September selloff found support near the March rising trend line.  This week’s rally pushed the ETF above the September falling trend line, signify an upside breakout and bullish reversal.  The overall technical backdrop remains positive, providing support for further advance.  This increases the probability for a retest of the September high, just below 130.

XLK has support near 110.  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 October 7, 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. The S&P continues drifting higher after climbed above the trend channel moving average last week.  Momentum has strengthened but Money Flow measure is registering a weak bullish signal.  The indicator peaked in July and formed series of lower highs as prices ascending, suggesting less and less money are chasing the rally.  Adding to concerns is the return of overbought conditions on intraday basis.  These elements will give the bulls more pressures than they have already had.  While more backing and filling would not be a surprise, if the S&P could hold above 3430 then a move above 3600 would be easier to achieve.

Short-term trading range: 3400 to 3600.  S&P has support around 3430.  A failure to hold above that level has measured move to around 3390.  Resistance is 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, overbought conditions have returned on an intraday basis but momentum remains supportive so downside risk could be limited. It is possible that S&P could continue to drift higher as trading sentiment remains strong.  As for strategy, buying into short-term dips remains the most profitable strategy.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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