S&P Shifted To Short-term Overbought Consolidation Phase

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Monday November 9, 2020.

We’ve noted in the previous Market Outlook that: “market is short-term overbought following recent advance. There could be a sell-off in the offing but it would be shallow if so.”  As anticipated, stocks closed mostly flat on Friday as traders looked for clarity around the presidential and congressional election results.  The S&P ended the session down about 1 point at 3,509.44. The Nasdaq Composite rose less than 0.1 percent to 11,895.23. The Dow Jones Industrial dipped 0.2 percent to 28,323.40.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell nearly 10 percent to 24.86.

Energy and financials were the worst-performing sectors in the S&P, falling 2.1 percent and 0.8 percent, respectively.  As such, the Financial Select Sector SPDR Fund (XLF) fell 0.79 percent on the day and is down nearly 19 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 epic selloff in early 2020, XLF has been coiled into a tight trading range as it worked off the extreme oversold conditions.  Last week’s rally pushed the ETF up against the 1-year moving average, a key technical level based on moving averages.  Over the next few weeks, it’d be important to watch trading behavior as the 25.50-26.30 zone is tested as resistance.  A sustain advance above it signify resumption of the multi-year uptrend.

The 2020 rising trend line, around 22, represents the logical level to measure risk against.  All bets are off should XLF close below that level.

Chart 1.2 – S&P 500 index (daily)

Short-term technical outlook remains 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”]

S&P moved down to test support at the lower boundary of the pink band after climbed above that level on Thursday.  Short-term momentum has weakened but does not appear strong enough to generate major breakdowns. Perhaps the positive Money Flow measure is the best illustration of the bulls’ case.  While more backing and filling would not be a surprise, a close below 3400 would see a massive pickup in volatility.

Short-term trading range: 3430 to 3400.  S&P has support around 3430-3400.  A failure to hold above that level has measured move to around 3325.  Resistance is around 3550.  A sustain advance above that level has measured move to 3600.

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 shifted to short-term overbought consolidation phase. 3400 is the line in the sand.  A failure to hold above that level would see an unwelcome pickup in downside volatility and bring the October low back into view.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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