S&P Rally Attempt Failed at Formidable Resistance

Editor’s note: this column was originally published on Capital Essence’s CEM News. It’s being republished as a bonus for the loyal readers. For more information about subscribing to CEM News, please click here.


Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Friday November 13, 2020.

Stocks fell on Thursday as an increasing number of U.S. coronavirus cases raised concerns over the health of the economy heading into year-end.  The Dow Jones Industrial Average dropped 1.1 percent to 29,080.17. The S&P slid 1.0 percent to 3,537.01, while the Nasdaq Composite dropped 0.7 percent to 11,709.59.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, jumped more than 8 percent to 25.35.

Materials and financials also came under pressure, with the latter taking a blow from retreating bank stocks following a surge earlier this week on positive vaccine news  JPMorgan Chase & Co (JPM), Wells Fargo & Company (WFC), Citigroup (C) were down 1 percent.  As such, the Financial Select Sector SPDR Fund (XLF) fell 1.66 percent on the day and is down more than 13 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.  Over the past few weeks, XLF has been trending higher after the mid-October correction found support near the 2020 rising trend line.  This week’s rally pushed the ETF above the 4-year moving average, a key technical level based on moving averages.  This is a positive development, signify a bullish breakout and upside reversal.  Right now the most important thing to watch is trading behaviors as the 26.28 zone is tested as support.  A close above that level on a weekly closing basis will confirm the bullish signal and trigger acceleration toward the early 2020 high, just above 31.

The 4-year moving average, around 26.30, 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 shifted to bearish (sell).  Last changed November 12, 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, the S&P sold off after recent rally attempt ran out of steam near the lower boundary of the red band.  In theory, the longer the index holds below this resistance the stronger it becomes. Adding to concerns is the Money Flow measure which began sloping lower over the past few days as prices ascending.  This is an intermediate-term bearish development.  Right now, the most important thing to watch is trading behavior near 3500.  We’d turn particular bearish if the index close twice below that level.  A break below 3500 has a measured move to 3400, which we’ve determined using the trend channel moving average.

On the upside, the lower boundary of the red band, or extreme overbought zone, around 3600, represents key resistance.  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 3460.  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, S&P rally attempt failed at formidable resistance.  If the index fails to hold above 3500 this week, then the next stop will be 3400 with the possibility of a brief breakdown below that level.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

© All rights reserved and actively enforced.
Note: This is a free edition of The Market Outlook, a daily CEM News subscriber newsletter. To get this column before market opens together with hundreds of technical trading ideas (including stocks and ETFs) every month, please click here.
Subscribe to CEM News to receive more in-depth research from Capital Essence.v