S&P In Confirmed Downleg

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Wednesday October 28, 2020.

We’ve noted in the previous Market Outlook that: “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.”  As anticipated, S&P closed lower Tuesday as concerns about the rising number of coronavirus cases dented investor sentiment once again.  Covid-19 infections in the U.S. surged above 8.7 million on Tuesday, with more than 20 states reporting record numbers of new cases.  The U.S. has averaged at least 71,000 new cases of the coronavirus over the last seven days, according to The New York Times, the highest seven-day number since the start of the outbreak.

For the day, the S&P fell 0.3 percent to 3,390.68.  The Dow Jones Industrial Average slid 0.8 percent to 27,463.19.  The Nasdaq Composite bucked the negative trend, rising 0.6 percent to 11,431.35 as tech shares gained broadly.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, rose more than 2 percent to 33.14.

Weakness in 3M (MMM) and Caterpillar (CAT) pushed industrials deep into the red. Both industrial stalwarts fail to provide guidance, though 3M did forecast sales to be flat to up low single digits in October.  As such, the Industrial Select Sector SPDR Fund (XLI) tumbled 2.19 percent on the day and is down about 5 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 Fund (weekly)

Our “U.S. Market Trading Map” painted XLI bars in red (sell) – see area ‘A’ in the chart.  Over the past few weeks, XLI has been trending higher after the September correction found support near the 2-year moving average, a key technical level based on moving average.  The late September rally tested resistance at the early 2020 breakdown point.  This week’s bearish reversal, suggested that the resistance would hold and a retest of the 74-73 zone should be expected.

XLI has resistance around 82.  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 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”]

Key technical development in Tuesday session was a consecutive close below the trend channel moving average, the level that offered support since the index broke out in September.  Tuesday’s downside follow-through confirmed Monday’s bearish reversal signal.  Money Flow measure is on a verge of falling below the zero line, indicating a weak net demand for stocks.  This is negative development, suggesting that the S&P might have to move to a much lower level to attract new buyers and we’re looking at 3300.  A close below 3364 will confirm this.

On the upside, S&P has 3400-3450 to trade against.  A close above 3450 will invalidate Monday’s bearish signal.

Short-term trading range: 3300 to 3500.  S&P has support around 3300.  A failure to hold above that level has measured move to around 3130.  Resistance is around 3400-3450.  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, Tuesday’s downside follow-through confirmed Monday’s bearish reversal signal.  While seemingly vulnerable to further short-term weakness, support is strong near the important sentiment 3300 mark. That zone is too big and too important to fall quickly.  It could help minimize downside follow-through and widespread breakdowns.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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