S&P In Orderly High-level Consolidation

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Wednesday November 18, 2020.

Stocks cut some losses but ended lower Tuesday, as investors digested data showing signs of weakness in the U.S. consumer, while Amazon’s foray into the pharmacy business sent drug store stocks lower.  The Commerce Department said Tuesday that retail sales rose 0.3 percent last month, missing economists’ forecast for a 0.5 percent rise. The retail sales control group – which has a larger impact on U.S. GDP – climbed 0.1 percent, well short of expectations for a 0.5 percent increase.

The Dow Jones Industrial Average dropped 0.6 percent to 29,783.35. The S&P dipped 0.5 percent to 3,609.53, while the Nasdaq Composite fell 0.2 percent to 11,899.34. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, rose more than 1 percent to 22.71.

A sea of red pharma stocks kept the broader market lower after Amazon confirmed its entry into the pharma business with the launch of Amazon Pharmacy. Under the service, U.S. customers would be able to order prescription medications directly from Amazon.  Walgreens Boots Alliance (WBA) and CVS Health (CVS) plunged more than 8 percent.  As such, the Health Care Select Sector SPDR Fund (XLV) fell 0.65 percent on the day but is up more than 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.  XLV rebounded nicely after the mid-October pullback found support near the 1-year moving average, a key technical level based on moving averages.  The early November rally pushed the ETF above the prior high set in early September, signify a bullish breakout.  Right now the most important thing to watch is trading actions near the 110 zone. If XLV could hold above that level than a test of the 127.2% Fibonacci extension, just below 130, is easier to achieve.

A failure to hold above 110 on a weekly closing basis will turn the short-term trend down and a retest of the early 2020 high, around 105, should be expected.

For now, 105 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 13, 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’s 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.  As mentioned, 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: 3550 to 3700.  S&P has support near 3600.  A failure to hold above that level has measured move to around 3550.  Resistance is around 3690-3700.  A sustain advance above that level has measured move to 3800.

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, 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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