S&P Upside To Be Limited By Overbought Conditions

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Wednesday December 2, 2020.

Equity market closed higher but off intraday high Tuesday as renewed hopes for fiscal stimulus and positive vaccine news lifted investor sentiment and eased worries about Covid-19 infections across the U.S.  Pharmaceutical giants Pfizer and Moderna (MRNA) moved closer to receiving EU approval for their respective Covid-19 vaccines after the European Medicines Agency said it could complete its assessment of both companies’ vaccines by December 29 and January 12 respectively. Coronavirus cases in America have doubled in a month to a record four million.

For the day, the Dow Jones Industrial Average climbed 0.6 percent to 29,823.92. The S&P rose 1.1 percent to 3,662.45. The tech-heavy Nasdaq Composite gained 1.3 percent to 12,355.11.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, rose 1 percent to 20.77.

Value stocks, those linked with the performance of the economy, clawed back some of their losses from a day earlier, with financials among the biggest gainers.  As such, the Financial Select Sector SPDR ETF (XLF) rose 1.54 percent on the day but is down about 8 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 ETF (weekly)

Our “U.S. Market Trading Map” painted XLF bars in green (buy) – see area ‘A’ in the chart. XLI has been on a tear in recent weeks after the mid-October correction found support near the 2020 rising trend line.   The early November pushed the ETF above the 4-year moving average, a key technical level based on moving averages, signify a bullish breakout and upside reversal.  The overall technical backdrop remains supportive of further advance.  So it seems to us that XLF could move up to test the early 2020 high, around just above 31, on overbought strength.

The 4-year moving average, round 26.50, 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 remains 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”]

Once again, the S&P moved up to test resistance at the red band after recent pullback found support near the lower boundary of the pink band. Money Flow measure flashed a weak bullish signal, the indicator hovers near the zero line as prices ascending, suggesting that the bears are more aggressive as prices off than the bulls were as prices ascended. Market is short-term overbought, following last week’s rally. This will give the bulls more pressure than they have already had.

For now, 3600 is the line in the sand.  A failure to hold above it indicated that long-term buying pressure has been exhausted and a much deeper pullback should be expected and we’re looking at 3460, based on the trend channel moving average.

On the upside, S&P has the lower boundary of the red band, just below the important sentiment 3700 mark, to trade against.  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: 3570 to 3700.  S&P has support near 3600.  A failure to hold above that level has measured move to around 3570-3460.  Resistance is around 3700.  A sustain advance above that level has measured move to around 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, the fact that the S&P is overbought as it approached key price level that had been successful in repelling price action in the past suggested that upside gains could be limited.  As for strategy, traders should consider buying into market dips rather than chasing breakouts.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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