S&P Could Continue To Drift Higher As Sentiment Remains Strong

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Friday December 18, 2020.

Stocks closed at record highs on Thursday, as the growing prospect of a stimulus deal before year-end offset concerns about the recovery following a surge in jobless claims. In a boost to hopes of a deal, House Speaker Nancy Pelosi said she hopes to receive the final legislative text on the deal later on Thursday.  The S&P gained 0.6 percent to 3,722.48, and the tech-heavy Nasdaq Composite advanced 0.8 percent to 12,764.75. The Dow Jones Industrial Average climbed 0.5 percent to 30,303.37.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell more than 3 percent to 21.82.

The broader market was led higher by materials, with Linde (LIN) and Newmont Goldcorp (NEM) among the biggest gainers in the sector.  As such, the Materials Select Sector SPDR ETF (XLB) rose 1.15 percent on the day and is up about 17 percent YTD, outperformed the S&P.  Now the question is what’s next?  Below is an update look at a trade in XLB.

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 – Materials Select Sector SPDR ETF (weekly)

Our “U.S. Market Trading Map” painted XLB bars in green (buy) – see area ‘A’ in the chart.  After a strong run of outperformance since reaching an interim low in early 2020, XLB peaked in mid-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 the rally and retreat behaviors as the November high, around 72.50, is tested.  A close above that level on a weekly closing basis suggested that the 2-month triangle pattern had resolved itself into a new downswing with initial upside target near 77, or the 127.2% Fibonacci extension.

The 2020 rising trend line, round 69, represents the logical level to measure risk against.  All bets are off should XLB close below that level.

Chart 1.2 – S&P 500 index (daily)

Short-term technical outlook remains bullish (buy).  Last changed December 15, 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.  Momentum has strengthened but Money Flow measure is registering a weak bullish signal.  The indicator peaked in August and formed series of lower highs as prices ascending, suggesting less and less money are chasing the rally.  Adding to concerns is the return of overbought conditions on intraday basis.  These elements will give the bulls more pressures than they have already had.  While more backing and filling would not be a surprise, if the S&P could hold above 3655 then a move above 3800 would be easier to achieve.

Short-term trading range: 3655 to 3780.  S&P has support near 3690-3655.  Below it, a more significant support lies at the trend channel moving average, currently at 3542.  Resistance is around 3780.  A sustain advance above that level has measured move to around 3900.

Long-term trading range: 3200 to 3800.  S&P has support near 3200.  A failure to hold above that level has measured move to 2900.  The index has resistance near 3800.  A close above that level has measured move to 4100.

In summary, overbought conditions have returned on an intraday basis but momentum remains supportive so downside risk could be limited. It is possible that S&P could continue to drift higher as trading sentiment remains strong.  As for strategy, buying into short-term dips remains the most profitable strategy.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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