S&P Vulnerable To Short-term Setback

Editor’s note: this column was originally published on Capital Essence’s CEM News. It’s being republished as a bonus for the loyal readers. For more information about subscribing to CEM News, please click here.


Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Tuesday December 8, 2020.

Stocks closed mix Monday as value stocks came under pressure from rising Covid-19 restrictions following a surge in cases over the past week, though losses were kept in check by optimism over an imminent vaccine roll out.  The S&P dipped 0.2 percent to 3,691.96.  The Dow Jones Industrial Average fell 0.5 percent to 30,069.79. The Nasdaq Composite, meanwhile, rose 0.5 percent to 12,519.95 and hit a fresh record high. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, rose more than 2 percent to 21.30.

Value stocks, which had been on a tear recently, lagged their growth counterparts on Monday as uncertainty grew over the near-term economic outlook. The iShares Russell 1000 Value ETF (IWD) dipped 0.6 percent, and the iShares Russell 1000 Growth ETF (IWF) climbed 0.4 percent.  IWD is down about 1 percent YTD, underperformed the S&P.  Now the question is what’s next?  Below is an update look at a trade in IWD.

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 – iShares Russell 1000 Value ETF (weekly)

Our “U.S. Market Trading Map” painted IWD bars in green (buy) – see area ‘A’ in the chart.  IWD has been on a tear in recent weeks after breakout above the June-October sideways trading range.  The early November rally pushed the ETF up against the late February bearish breakaway gap. This level is significant in charting terms.  The overall technical backdrop remains supportive of further advance.  Right now the most important thing to watch is trading behavior as the 137-139 zone is tested.  A close above 139 on a weekly closing basis signify a bullish breakout and trigger acceleration toward the 167 zone, or the 127.2% Fibonacci extension.

The 2020 rising trend line, just below 128, represents the logical level to measure risk against.  All bets are off should IWD 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”]

S&P retreated after recent rally found resistance near the important sentiment 3700 mark.  Momentum indicator is fast approaching the level that has been successful in repelling price actions over the past months, suggesting market is due for some kind of a pullback the way we had in September and October.  For now, 3600 is the line in the sand.  A close below that level has measured move to around 3500, based on the trend channel moving average.  That’s about 5 percent pullback, the way we’ve had over the past few months.  So it would be a normal, probably refreshing activity to have come down.  Perhaps the positive Money Flow measure is the best illustration of the bull’s case.

For now, 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: 3600 to 3700.  S&P has support near 3650.  A failure to hold above that level has measured move to around 3600.  A failure to hold above 3600 indicated that long-term buying pressure has been exhausted and a much deeper pullback should be expected and we’re looking at 3475, based on the trend channel moving average.  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, S&P developed a high volatility with fast up and down moves near the lower boundary of the red band.  While market seems vulnerable to some downside retracement over the short-term, we’re long-term positive for S&P as we believe selloff would be shallow and quick.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

© All rights reserved and actively enforced.
Note: This is a free edition of The Market Outlook, a daily CEM News subscriber newsletter. To get this column before market opens together with hundreds of technical trading ideas (including stocks and ETFs) every month, please click here.
Subscribe to CEM News to receive more in-depth research from Capital Essence.v