S&P In Digestion Period

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Thursday November 12, 2020.

We’ve noted in the previous Market Outlook that: “while market is overbought as S&P moved down to test key price level, market internal remains supportive of further advance.  While some backing and filling would not be a surprise, the bulls will continue to have the benefit of the doubts as long as S&P holds above 3500.”  As anticipated, S&P closed higher Wednesday, up 0.8 percent to 3,572.66, as tech shares recovered some of their losses from earlier in the week at the expense of names who would benefit from an economic recovery.  The Nasdaq Composite jumped 2 percent to 11,786.43.  The Dow Jones Industrial Average fell 0.1 percent to 29,397.63.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell more than 5 percent to 23.79.

Tech and consumer discretionary, the worst-performing sectors this week, outperformed on Wednesday. Tech was up by more than 2 percent, and consumer discretionary gained 1.5 percent.  As such, the Technology Select Sector SPDR Fund (XLK) rose 2.37 percent on the day and is up more than 32 percent YTD, outperformed the S&P.  Now the question is what’s next?  Below is an update look at a trade in XLK.

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 – Technology Select Sector SPDR Fund (weekly)

Our “U.S. Market Trading Map” painted XLK bars in green (buy) – see area ‘A’ in the chart.  The first dominant feature on the chart is the rising trend starting in early 2020.  The second dominant feature of the chart is the sideways trading range between 128 and 110 since early September, which represents the digestion period.  This week’s rally pushed the ETF up against the closely watch 128 zone, or the 127.2% Fibonacci extension. The overall technical backdrop remains positive, suggesting that the path with least resistance remains higher. Right now the most important thing to watch is trading behaviors as the 128 zine is tested as resistance.  A close above that level on a weekly closing basis signify a bullish breakout and trigger acceleration toward the 161.8% Fibonacci extension, just below 160.

The late September low, around 110, represents the logical level to measure risk against.  All bets are off should XLK 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 continues basing sideway near the lower boundary of the red band after breaking out above the important sentiment 3600 mark on Monday. Market is overbought following recent advance but Money Flow measure is above the zero line, indicating a positive net demand for stocks.  This certainly would argue that the path with least resistance remains to the upside.

Over the next few days, the most important to watch is trading behavior near the lower boundary of the red band, or extreme overbought zone, around 3600.  Technically speaking, the normal behavior for the S&P has been to consolidate and retreated almost every time it traded above that level so there is a high probability that a significant consolidation pattern will again develop in this area.

Short-term trading range: 3400 to 3660.  S&P has minor support near 3540.  A failure to hold above that level has measured move to around 3400.  Resistance is around 3600.  A sustain advance above that level has measured move to 3660.

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 big picture remains the same.  There’s an orderly high-level consolidation period near S&P’s 3600, which represented the digestion period in the aftermath of the late October rally.  Market internals remains positive and downside momentum does not appear strong enough to generate widespread breakouts.  As for strategy, buying into short-term dips remains the most profitable strategy.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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