S&P’s 3700 Continues To Act As Price Magnet

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Thursday December 3, 2020.

We’ve noted in the previous Market Outlook that: “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.”  As anticipated, stocks traded lower in early Wednesday session after data showed private payrolls increased less than expected in November as soaring new infections and business restrictions hampered the labor market’s recovery. The market however, managed to overcome the early weakness and closed higher.  The broad market index ended the day up 0.2 percent to 3,669.01. The Dow Jones Industrial Average climbed 0.2 percent to 29,883.79. The Nasdaq Composite dipped 0.1 percent to 12,349.37.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, rose about 2 percent to 21.17.

Oil prices rose more than 1 percent on Wednesday as the market awaited a pact from producers on output, which many traders expect will continue to be reined in, and Britain’s approval of a COVID-19 vaccine boosted hopes for a demand recovery.  As such, the Energy Select Sector SPDR ETF (XLE) jumped 3.25 percent on the day but is down more than 36 percent YTD, underperformed the S&P.  Now the question is what’s next?  Below is an update look at a trade in XLE.

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 – Energy Select Sector SPDR ETF (weekly)

Our “U.S. Market Trading Map” painted XLE bars in green (buy) – see area ‘A’ in the chart. XLE has been on a tear in recent weeks after the June downswing found support near the prior low set in March.   The November rally pushed the ETF up against the 1-year moving average, a key technical level based on moving averages.  That level was significant when the ETF fell below it in late 2018.  The overall technical backdrop remains supportive of further advance. A close above 40 on a weekly closing basis will confirm the bullish signal and trigger acceleration toward the 45 zone, or the 38.2% Fibonacci retracement and the June recovery high.

The November rising trend line, round 34, represents the logical level to measure risk against.  All bets are off should XLE 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”]

The big picture remains the same. The S&P continues drifting higher after recent pullback found support near the lower boundary of the pink band.  This is a positive development but let’s notice that with Wednesday’s gains, the index is about 30 points, or less than 1 percent, below lower boundary of the red band.  Technically speaking, a trade above that level indicates extreme overbought conditions.  Adding to concerns is the lagging Money Flow measure.  The indicator printed a lower high as prices ascending, indicating less money is chasing prices higher.  These elements will give the bulls more pressure than they have already have.

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, around 3700, 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: 3580 to 3700.  S&P has support near 3644.  A failure to hold above that level has measured move to around 3615-3580.  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, although overbought condition is keeping buyers at bay, S&P’s 3700 continues to act as price magnet.  Short-term traders can anticipate increase short-term volatility with rapid up and down moves in the market.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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