S&P Rally Shown Signs Of Buyer’s Fatigue

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Tuesday December 15, 2020.

We’ve noted in the previous Market Outlook that: “an overbought pullback consolidation interrupted the multi-month rally in the S&P.  Although seemingly vulnerable to further short-term weakness, the bears will not have any cases unless they manage to push the S&P below 3600.  We’d turn particular bearish if the index closes twice below that level.”  As anticipated, S&P fell on Monday, down 0.4 percent to 3,647.49, as fears of additional Covid-19 restrictions offset the optimism around a vaccine rollout.  The Dow Jones Industrial Average gave up 0.6 percent to 29,861.55.  The Nasdaq Composite outperformed, rose 0.5 percent to 12,440.04.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, jumped 6 percent to 24.72.

Shares of companies that would benefit from the economy reopening lagged companies that thrived early on in the pandemic. United Airlines dropped 3.4 percent. Amazon, meanwhile, popped 1.3 percent, as the crucial holiday season is underway.  As such, the Consumer Discretionary Select Sector SPDR ETF (XLY) rose 0.15 percent on the day and is up about 25 percent YTD, outperformed the S&P.  Now the question is what’s next?  Below is an update look at a trade in XLY.

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 – Consumer Discretionary Select Sector SPDR ETF (weekly)

Our “U.S. Market Trading Map” painted XLY bars in green (buy) – see area ‘A’ in the chart.  After a strong run of outperformance since the market reached an interim low in early 2020, XLY peaked in mind-November and coiled into a tight trading range as it worked off overbought conditions.  The overall technical backdrop remains supportive of further advance. Right now the most important thing to watch is trading behavior as the 160-165 zone is tested as resistance.  A close above 165 on a weekly closing basis signify that the November triangle pattern had resolved itself into a new upswing with initial downside target just above 200, based on the 161.8% Fibonacci extension.

The 2020 rising trend line, round 150, represents the logical level to measure risk against.  All bets are off should XLY close below that level.

Chart 1.2 – S&P 500 index (daily)

Short-term technical outlook remains bearish (sell).  Last changed December 9, 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”]

Once again, S&P retreated after the early rally attempt ran out of steam near the important sentiment 3700 mark.  The index is now testing support at the lower boundary of the pink band, currently at 3640.  That level was tested several times over the past weeks.  Momentum indicator trended lower from near overbought zone, suggesting further short-term weakness likely.  Money Flow measure is below the zero line, indicating a negative net demand for stocks.  These elements will continue negatively affect trading sentiment in the coming days.

Right now the most important thing to watch is trading behavior as the 3640-3600 zone is tested as support.  Technically speaking, when strong support is broken it means that near-term buying pressure has finally been exhausted.  With that said, a close below 3600 is outright bearish and a much deeper pullback should be expected and we’re looking at 3500.

Short-term trading range: 3500 to 3760.  S&P has support near 3640-3600.  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 3500, based on the trend channel moving average.  Resistance is around 3700.  A sustain advance above that level has measured move to around 3760.

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 late October rally is showing signs of buyer’s fatigue, noting a struggle for the S&P to get far past the important sentiment 3700 mark.  A failure to move above key resistance means that most of the potential buyers at this level had already placed their bets. The next batch of buyers typically sits at a much lower level.  This is the danger in the current market.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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