S&P Spinning Top Pattern Signals Impending Trend Reversal

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Tuesday November 10, 2020.

Stocks closed sharply higher on Monday as investors cheered trial data from drugmakers Pfizer and BioNTech indicating their Covid-19 vaccine is more than 90% effective. Shares of airlines and other travel-related stocks posted the biggest gains.  The Dow Jones Industrial Average jumped 2.95 percent to 29,157.97.  The S&P popped 1.2 percent to 3,550.50.  The Nasdaq Composite closed lower by 1.5 percent to 11,713.78 as traders rotated out of high-flying technology names that outperformed during the pandemic into more beaten-down value stocks.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, rose nearly 4 percent to 25.75.

Pfizer (PFE) said its Covid-19 vaccine is 90% effective at preventing infection.  Pfizer and partner Biontech Se (BNTX) will seek regulatory approval for the vaccine by the end of November. The company said it could manufacture and distribute 1.3 billion doses by the end of next year.  As such, the Health Care Select Sector SPDR Fund (XLV) added about 1 percent on the day and is up nearly 9 percent YTD, slightly underperformed the S&P.  Now the question is what’s next?  Below is an update look at a trade in XLV.

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 – Health Care Select Sector SPDR Fund (weekly)

Our “U.S. Market Trading Map” painted XLV bars in green (buy) – see area ‘A’ in the chart.  Over the past few weeks, XLV has been trending higher after the mid-October selloff found support near the one-year moving average.  This week’s upside follow-through confirmed last week’s bullish breakout signal. This is a positive development, opened up for a test of the more important resistance near the 130 zone, or the 127.2% Fibonacci extension.  A close above 110 on a weekly closing basis will confirm this.

The early September high, around 110, represents the logical level to measure risk against.  All bets are off should XLV 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 up to test resistance at the upper boundary of its short-term trading range after climbed above the trend channel moving average last week.  In accordance to the Japanese candlestick pattern recognition, Monday’s spinning top indicated uncertainty.  Technically speaking, when a spinning top forms after an upswing in the market, it can be an indication of a pending reversal, as the indecision in the market is representative of the buyers losing momentum.  Adding to concerns is the overbought conditions. These elements suggested that risk is greater to the downside in the short to medium-term.

Money Flow measure however, still above the zero line, indicating a positive net demand for stocks.  This could help putting a short-term floor under the market.  With this in mind, we’d look to buying downside protection on winning positions.

Short-term trading range: 3480 to 3650.  S&P has support around 3480.  A failure to hold above that level has measured move to around 3400.  Resistance is around 3650.  A sustain advance above that level has measured move to 3780.

Long-term trading range: 2750 to 3730.  S&P has support near 3200.  A failure to hold above that level has measured move to 3100.  The index has resistance near 3700.  A close above that level has measured move to 3900.

In summary, the spinning top candlestick pattern in the S&P together with overbought conditions suggested that market is at or very close to a significant near-term top. Near-term risk is to the downside.  Traders should consider buying downside protection on winning positions.

 

Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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