S&P In Short-term Reflexive Bounce

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Tuesday November 3, 2020.

We’ve noted in the previous Market Outlook that: “S&P is short-term oversold following recent decline.  Like a rubber band, stocks tend to snap back to the mean if they have dropped too far from the “fair” value. With that said, if lower stock prices create some values for investors, then, given everything being equal, the market should be able to find some buyers.  However, give the significant damage that had been done over the past days, upside reward could be limited.”  As anticipated, stocks closed higher Monday, on a late-day rebound in tech from session lows and strength in value stocks ahead of the U.S. election on Tuesday. For the day, the S&P gained 1.2 percent to 3,310.24. The Nasdaq Composite rose 0.4 percent to 10,957.61.  The Dow Jones Industrial Average added 0.6 percent to 26,925.05.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell more than 2 percent to 37.13.

Value stocks across sectors like energy, materials, and industrials were in favor as investors bet that a Joe Biden presidential victory could boost the economy.  Ahead of the U.S. presidential election, national polls suggest that former Vice President Joe Biden maintained his strong lead over the weekend against President Donald Trump in key battleground states.  As such, the Materials Select Sector SPDR Fund (XLB) jumped 3.32 percent on the day and is up more than 6 percent YTD, outperformed the S&P.  Now the question is what’s next?  Below is an update look at a trade in XLB.

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 – Materials Select Sector SPDR Fund (weekly)

Our “U.S. Market Trading Map” painted XLB bars in green (buy) – see area ‘A’ in the chart.  Ove the past few weeks, XLB has been trending lower in a short-term corrective mode early October rally ran out of steam near the prior high set in mid-September.  The correction found support near the 2020 rising trend line.  That level roughly corresponds with the late September low.  This week’s rally signify a bullish reversal, opened up for a retest of the September high, around 67.  A sustain advance above that level could trigger acceleration toward the 77 zone, or the 127.2% Fibonacci extension.

XLB has support around 62.  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”]

As expected, S&P rebounded nicely off support at the lower boundary of the green band.  Momentum indicator shifted higher from near oversold zone, allowing additional upside probing.  Money Flow measure climbed above the zero line, indicating a positive net demand for stocks. This is a short-term positive development.

Over the next few days, traders should monitor trading behavior as the trend channel moving average is tested as resistance.  Some aggressive traders might use this level like a magnet to sell.  With that said, unless there is a close above 3400, the path with least resistance remains to the downside.

With that said, if the market is going to find bottom in the near term, we want to see the S&P establishes some trading ranges and climbs above 3400.  Staying below that level heralds more losses.

Short-term trading range: 3200 to 3400.  S&P has support around 3200.  A failure to hold above that level has measured move to around 3130.  Resistance is around 3375-3400.  A sustain advance above that level has measured move to 3500.

Long-term trading range: 2750 to 3730.  S&P has support near 3100.  A failure to hold above that level has measured move to 2750.  The index has resistance near 3600.  A close above that level has measured move to 3900.

In summary, S&P rebounded nicely after recent pullback found support near the lower boundary of the green band.  Our near-term work on price structure and momentum suggested that the index is in a short-term reflexive bounce.  Nevertheless, traders will be looking for the index to close above 3400 before getting aggressively long again.

 

Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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