Market Internals Weakened As S&P Tested Key Support

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Tuesday December 22, 2020.

We’ve noted in the previous Market Outlook that: “although overbought condition is keeping buyers at bay, S&P’s 3800 continues to act as price magnet.  Short-term traders can anticipate increase short-term volatility with rapid up and down moves in the market.”  As anticipated, the S&P closed lower on Monday, having clawed its way back from steep losses early in the session as investors juggled the outbreak of an ominous new strain of COVID-19 with the passage of a long-anticipated stimulus package.  For the day, the broad equity index dipped 0.4 percent to 3,694.92 after falling nearly 2 percent at its session low. The Nasdaq Composite fell 0.1 percent to 12,742.52. The Dow Jones Industrial Average erased a 400-point loss to eke out a small gain as strength in Nike and bank shares supported the blue-chip benchmark, rose 0.1 percent to 30,216.45.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, surged more than 16 percent to 25.16.

Banks bucked the trend. JPMorgan and Goldman up 3.8 percent and 6.1 percent, respectively after the U.S. Federal Reserve released the results of its semiannual stress test late Friday and announced relaxed restrictions on buybacks and dividends.  As such, the SPDR S&P Regional Banking ETF (KRE)  rose 0.53 percent on the day but is down more than 13 percent YTD, underperformed the S&P.  Now the question is what’s next?  Below is an update look at a trade in KRE.

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 – SPDR S&P Regional Banking ETF (weekly)

Our “U.S. Market Trading Map” painted KRE bars in green (buy) – see area ‘A’ in the chart. Over the past few weeks, KRE has been trending lower in a short-term corrective mode after the early October rally ran out of steam near the 4-year moving average, a key technical level based on moving averages.   The overall technical backdrop remains positive, suggesting that the recent weakness is merely a short-term pause which is taking place within a context of a secondary upswing. With this in mind, we’d look to increase exposure into short-term weakness toward the 47 zone, or the November breakout point.  If KRE could hold above that level then a move above the 52 zone would be easier to be achieved.

The November breakout point, around 47, represents the logical level to measure risk against.  All bets are off should KRE 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”]

As expected, S&P moved down to test support at the lower boundary of the pink band after recent rally stalled just above 3700. Momentum indicator trended lower from overbought zone, suggesting further short-term weakness likely.  Money Flow measure flashed a bearish signal as it trended lower from below the zero line, indicating a negative net demand for stocks.  Right now, 3670 is the line in the sand. A close below that level would see a massive pickup in volatility and a test of the more important support near 3550, based on the trend channel moving average, should be expected.

Short-term trading range: 3670 to 3780.  S&P has support near 3670.  Below it, a more significant support lies at the trend channel moving average, currently at 3552.  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, market internals had been weakened as S&P moved down to test support at the lower boundary of the pink band.  The longer the index stays near that level, the more vulnerable it is to lower prices.  This is the real danger in the current market.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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