S&P In Sideways Trend That Reflects An Indecisive Market

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Monday November 23, 2020.

Stocks fell on Friday as worries about the economic recovery continue to mount after U.S. Treasury Secretary Steven Mnuchin said emergency lending programs that had steadied the economy during the pandemic would not be renewed.  Mnuchin said late Thursday he does not plan to extend several crucial emergency lending programs when they expire at the end of year, raising worries about the outlook for the recovery.  For the day, the S&P dipped 0.7 percent to 3,557.54. The Nasdaq Composite pulled back by 0.4 percent to 11,854.97.  The Dow Jones Industrial Average dropped 0.8 percent to 29,263.48.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, rose more than 2 percent to 23.70.

Financials were hurt by regional banks, with W. R. Berkley (WRB), Citizens Financial Group (CFG) and Regions Financial (RF) down more than 2 percent. A slip in U.S. Treasury yields, with the United States 10-Year TIPS falling 2 percent, exacerbated weakness in banks.  As such, the SPDR S&P Bank ETF (KBE) fell 0.95 percent on the day and is down more than 18 percent YTD, underperformed the S&P.  Now the question is what’s next?  Below is an update look at a trade in KBE.

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 – SPDR S&P Bank ETF (weekly)

Our “U.S. Market Trading Map” painted KBE bars in green (buy) – see area ‘A’ in the chart.  KBE moved up to test resistance at the 40 zone after climbed above the June recovery high in early November.  That level is significant when the ETF fell below it in early 2020, signify the multi-month head-shoulder pattern had resolved itself into a new downswing. A close above that level will invalidate the bearish signal and trigger acceleration toward the 48-52 zone, of the late 2019 and early 2018 highs.

The early November bullish breakaway gap, around 35, represents the logical level to measure risk against.  All bets are off should KBE close below that level.

Chart 1.2 – S&P 500 index (daily)

Short-term technical outlook remains bearish (sell).  Last changed November 18, 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”]

Following the late October massive rally, S&P has been coiled into a tight trading range as traders await new catalysts.  Technically speaking, the fact that the S&P managed to hold on to most of the gains suggested that the bulls are in the driver side of the market.  However, given the damages done over the past days, the near-term risk is greater to the downside.  The bulls has 3600-3650 to trade against.  Staying below that level heralds more losses.

Short-term trading range: 3480 to 3700.  S&P has support near 3550.  A failure to hold above that level has measured move to around 3480.  Resistance is around 3600.  A sustain advance above that level has measured move to around 3700.

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 remains in a short-term consolidation phase that reflects an indecisive market.  Our work on price pattern and momentum suggested that near-term risk is greater to the downside.  The bulls has 3600-3650 to trade against.  Staying below that level heralds more losses.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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