S&P Could Test 3700 On Overbought Strength

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Wednesday November 25, 2020.

Equity market closed higher Tuesday as value stocks continued to ride the wave of positive vaccine news and easing uncertainty over the U.S. presidential transition. The Dow Jones Industrial Average rose 1.5 percent to 30,046.24. The S&P climbed 1.6 percent to 3,635.41, and the Nasdaq Composite advanced 1.3 percent to 12,036.79.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell more than 4 percent to 21.64.

Industrials were pushed higher by an ongoing rally in the airlines, with American Airlines Group (AAL) and United Airlines (UAL) up more than 9%. Boeing (BA) was up 5 percent.  As such, the Industrial Select Sector SPDR Fund (XLI) rose 1.75 percent on the day and is up 10 percent YTD, slightly underperformed the S&P.  Now the question is what’s next?  Below is an update look at a trade in XLI.

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 – Industrial Select Sector SPDR Fund (weekly)

Our “U.S. Market Trading Map” painted XLI bars in green (buy) – see area ‘A’ in the chart.  XLI has been on a tear in recent weeks after the late October correction found support near the one-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 2020, signify a bullish breakout and upside reversal. This week’s upside follow-through confirmed the bullish signal and trigger acceleration toward the 105 zone, or the 127.2% Fibonacci extension.

The early 2020 high, just above 85, represents the logical level to measure risk against.  All bets are off should XLI close below that level.

Chart 1.2 – S&P 500 index (daily)

Short-term technical outlook shifted to bullish (buy).  Last changed November 24, 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 rebounded nicely after recent pullback found support near the lower boundary of the pink band.  With Tuesday’s gains, the index is up against the red band.  Technically speaking, a trade above that zone indicated extreme overbought conditions – a situation that often precursor to a meaningful correction.  Nevertheless, the fact that the S&P managed to hold on to most of late October-November gains despite overbought conditions is impressive.  This certainly would argue that the near-term risk remains to the upside.

For now, the lower boundary of the pink band, around 3550, is the line in the sand.  A close below that level will trigger another selloff with initial downside target around 3435-3400.  The lower boundary of the red band, around 3650, represents key price level.  A close above that level could trigger acceleration toward the low 3700s.

Short-term trading range: 3480 to 3700.  S&P has support near 3580-3550.  A failure to hold above that level has measured move to around 3435-3400.  Resistance is around 3650.  A sustain advance above that level has measured move to the low 3700s.

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 could continue to drift higher as trading sentiment remains positive.  There is a high probability that overbought conditions can be sustained for a few days, potentially allowing for a test of the important sentiment 3700 mark before a significant pullback unfolds.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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