S&P At Key Juncture

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Wednesday November 4, 2020.

We’ve noted in the previous Market Outlook that: “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.”  As anticipated, stocks climbed Tuesday as value stocks racked up gains on hopes that a victory for Vice President Joe Biden will ensure a more generous stimulus package is rolled out to inject power into the economic recovery.  For the day, the S&P climbed 1.8 percent to 3,369.16 and the Nasdaq Composite advanced 1.9 percent to 11,160.57.  The Dow Jones Industrial Average rose 2.1 percent to 27,480.03.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell nearly 5 percent to 35.33.

Financials were led higher by banking stocks as Treasury yields climbed on hopes that the passing of election uncertainty could refocus lawmakers’ efforts on policies that would ensure the economic recovery remains on track.  JPMorgan Chase (JPM) and Citigroup (C) closed 3% higher, while Bank of America (BAC) was up 2%.  As such, the Financial Select Sector SPDR Fund (XLF) jumped 2.22 percent on the day but is down nearly 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 Fund (weekly)

Our “U.S. Market Trading Map” painted XLF bars in green (buy) – see area ‘A’ in the chart.  Following the massive selloff in early 2020, XLF has been coiled into a tight trading range as it worked off oversold conditions.  More often than not, coil or triangle formation tends to resolve in the direction of the existing trend, which is down in this case.  This week’s rally pushed the ETF up against the one-year moving average, just below 26.  There is no reason to turn particular bullish until this zone is eclipsed. On the down side, XLF has 24 to trade against.  A close below that level on a weekly closing basis signify a bearish breakout and a retest of the March low should be expected.

XLF has support around 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 shifted to bullish (buy).  Last changed November 3, 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 moved up to test resistance at the trend channel moving average after recent pullback found support near the lower boundary of the green band, or oversold zone.  That level was tested several times over the past months.  This is a short-term positive development.  Momentum indicator trended higher from near oversold zone, allowing additional upside probing.  Money Flow measure also trended higher from above the zero line, indicating an increase in buying pressure.

Over the next few days, trader 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, 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 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 is at key technical juncture.  Current rally is testing formidable resistance near 3400.  The longer the index stay below that level, the more vulnerable it is to lower prices.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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