Buying Pressure Deteriorated As S&P Tested Key Level

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Tuesday October 20, 2020.

We’ve noted in the previous Market Outlook that: “there is currently a test of resistance at the important sentiment 3500 mark.  If the S&P fails to climb above that level this week than the next stop will be 3400 with the possibility of a brief breakdown below that level.”  As expected, S&P traded as high as 3502 in early Monday before gave up all of the early gains after U.S. House Speaker Nancy Pelosi reportedly signaled that a deal was not imminent, denting hopes of a deal somewhat with just a day to go until the Tuesday deadline imposed by the house speaker. For the day, the bench mark gauge dropped 1.6 percent to 3,426.92 and the Nasdaq Composite pulled back 1.7 percent to 11,478.88.  The Dow Jones Industrial Average gave up 1.4 percent to 28,195.42.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, rose more than 6 percent to 29.11.

Financials started the week on a sour note, led by Intercontinental Exchange (ICE), JPMorgan Chase (JPM), and State Street (STT) with the latter down more than 3 percent.  Goldman Sachs Group (GS), turned negative after rising intraday after Credit Suisse (CSGN) lifted its price target on the stock to $262 from $255.  As such, the Financial Select Sector SPDR ETF (XLF) fell 1.52 percent on the day and is down more than 20 percent YTD, underperformed the S&P.  Now the question is what’s next?  Below is an update look at a trade in XLF.

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 – Financial Select Sector SPDR ETF (weekly)

Our “U.S. Market Trading Map” painted XLF bars in green (buy) – see area ‘A’ in the chart.  Over the past few weeks, XLF has been basing sideways after the late September recovery rally ran out of steam near the 1-year moving average.  That level is significant in charting terms.  It was tested several times over the past months.  The overall technical backdrop remains positive, providing support for further advance. Right now, the most important thing to watch is trading behavior near the 26 zone.  A close above that level on a weekly closing basis will bring the early 2020 high into view.

XLF has support near 24.  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 bearish (sell).  Last changed October 15, 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 after the early rally attempt ran out of steam near the important sentiment 3500 mark. That level was tested several times over the past months.  Technically speaking, the longer the index holds below this resistance the stronger it becomes.  Market internal deteriorated.  Money Flow measure is on a verge of falling below the zero line, indicating a weak net demand for stocks.  Right now, the most important thing to watch is the retreat and rebound behavior as the trend channel moving average, around 3400, is tested as support.  A close below that level suggested that the next leg would be lower and we’re looking at 3300.

Short-term trading range: 3400 to 3600.  S&P has support around 3400.  A failure to hold above that level has measured move to around 3300.  Resistance is around 3500.  A sustain advance above that level has measured move to 3600.

Long-term trading range: 3150 to 3730.  S&P has support near 3350.  A failure to hold above that level has measured move to 3150.  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 is an orderly pullback consolidation, which represents digestion period.  However, the fact that buying pressure deteriorated as the S&P moved down to test key price level suggested that most of the potential buyers at this level had already placed their bets.  The next batch of buyers typically sits at a much lower level.  With this in mind we’d look to reduce exposure into intraday bounces.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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