Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Tuesday October 27, 2020.
Stocks fell sharply on Monday as coronavirus infections jumped and negotiations for a fiscal stimulus package before the election stalled once again. The Dow Jones Industrial Average tumbled 2.3 percent to 27,685.38. The S&P slid 1.9 percent to 3,400.97 and the Nasdaq Composite dipped 1.6 percent to 11,358.94. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, surged more than 20 percent to 33.10.
Tech, which had led the rally since the mid-March bottom, added to the broader market selloff. SAP, one of the biggest software companies in Europe, saw its shares plunge more than 20 percent after warning that businesses are holding back from spending; it also cut its earnings and revenue estimates for 2020. Oracle and Microsoft followed SAP lower, sliding 4 percent and 2.8 percent, respectively. As such, the Technology Select Sector SPDR ETF (XLK) tumbled 2.17percent on the day but is up more than 26 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 ETF (weekly)
Our “U.S. Market Trading Map” painted XLK bars in red (sell) – see area ‘A’ in the chart. Over the past few weeks, XLK has been trending lower in a short-term corrective mode after the late September rally ran out of steam near the prior high set in early September. The correction is testing support at the 2020 rising trend line. If XLK could hold above that level then a retest of the September high would be easier to achieve. A close below 112 on a weekly closing basis signify a bearish breakout, has measured move to around 103.
XLK has resistance around 128. 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 26, 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 fell below the trend channel moving average, the level that offered support since the index broke out in September. Momentum indicator shifted lower, suggesting further short-term weakness likely. Right now, follow-through is the key. We’d turn particular bearish if the index closes twice below 3400.
On the upside, S&P has 3408-3433 to trade against. A close above 3433 will invalidate Monday’s bearish signal.
Short-term trading range: 3400 to 3500. S&P has support around 3400. A failure to hold above that level has measured move to around 3300. Resistance is around 3433-3460. A sustain advance above that level has measured move to 3500.
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, Monday’s massive selloff pushed S&P down to key support at the 3400 zone. Near-term technical outlook is not favorable over the short to intermediate term, suggesting the support might not hold for long. A failure to bounce off key support means that long-term buying pressure has finally been exhausted. The stronger the support level, the more powerful the selloff.
Thanks and happy trading.
(By：Michelle Mai for Capital Essence)
© All rights reserved and actively enforced.
Note: This is a free edition of The Market Outlook, a daily CEM News subscriber newsletter. To get this column before market opens together with hundreds of technical trading ideas (including stocks and ETFs) every month, please click here.
Subscribe to CEM News to receive more in-depth research from Capital Essence.v