Expect Increase Near-term Volatility In S&P

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Tuesday October 13, 2020.

We’ve noted in the previous Market Outlook that: “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.” Stocks closed higher Monday as investors piled into tech names with Apple attracting the bulk of buying action ahead of its slate of new iPhones expected to be unveiled on Tuesday.  The S&P gained 1.6 percent to 3,534.22.  The Nasdaq Composite advanced 2.6 percent to 11,876.26. The Dow Jones Industrial Average rose 0.9 percent to 28,837.52.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, rose less than 1 percent to 25.07.

Sentiment on stocks was also supported by ongoing hopes U.S. lawmakers will agree on a skinny stimulus package that could include support for Americans, small businesses, and the aviation industry.  As such, the iShares Transportation Average ETF (IYT) rose 0.17 percent on the day and is up more than 7 percent YTD, slightly underperformed the S&P.  Now the question is what’s next?  Below is an update look at a trade in IYT.

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 – iShares Transportation Average ETF (weekly)

Our “U.S. Market Trading Map” painted IYT bars in green (buy) – see area ‘A’ in the chart.  Over the past few weeks, IYT has been trending higher after the mid-September selloff found support near the 2020 rising trend line.  This week’s upside follow-through confirmed last week’s bullish reversal signal.  The overall technical backdrop remains positive, providing support for further advance.  This increases the probability for a rapid advance toward the 127.2% Fibonacci extension, just above 250.  A close above 210 on a weekly closing basis will confirm this.

IYT has support near 200.  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”]

As expected, S&P continues drifting higher after breaking out above the trend channel moving average last week.  This week’s rally pushed the index above the lower boundary of the red band.  As mentioned, the red zone indicated extreme overbought conditions. The normal behavior for the S&P has been to consolidate and retreated almost every time it traded above that level so there is a high probability that a significant consolidation pattern will again develop in this area

Nevertheless, the overall technical backdrop remains positive.  This certainly would argue that the path with least resistance remains to the upside.

Short-term trading range: 3450 to 3600.  S&P has support around 3450.  A failure to hold above that level has measured move to around 3400.  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, the fact that the S&P is overbought as it moves up to test key price level does not favor a sustain break to the upside.  What this means is that as the index inches into the area of key overhead resistance, aggressive sellers will most likely dips in their toes to see how the market reacts.  Expect increase in near-term volatility.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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