Market Internal Deteriorated As S&P Tests Key Support

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Thursday December 24, 2020.

We’ve noted in the previous Market Outlook that: “S&P shifted to short-term consolidation phase that reflects an indecisive market.  While near-term risk is greater to the downside, markets are volatile and traders may prefer not to hold large positions overnight.”  As anticipated, the S&P erased most of its gains and closed little changed on Wednesday, rose less than 0.1 percent to 3,690.01, amid year-end profit-taking, while policy uncertainty weighed on sentiment as President Donald Trump picked fights with Congress.  The Dow Jones Industrial Average rose 0.38 percent to 30,129.83. The Nasdaq Composite fell 0.3 percent to 12,771.11.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell more than 3 percent to 23.31.

Technology stocks ended lower as the Fab 5 traded closed mostly in the red. Microsoft MSFT), Apple (AAPL) and (AMZN) were lower, while Alphabet (GOOGL) and Facebook (FB) traded above the flatline.  As such, the Technology Select Sector SPDR Fund (XLK) fell 0.76 percent on the day but is up about 40 percent YTD, outperformed the S&P.  Now the question is what’s next?  Below is an update look at a trade in XLK.

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 – Technology Select Sector SPDR Fund (weekly)

Our “U.S. Market Trading Map” painted XLK bars in green (buy) – see area ‘A’ in the chart. XLK has been on a tear in recent days after the mid-October pullback found support near the 2020 rising trend line.  This week’s upside follow-through confirmed last week’s bullish breakout above the closely watch 127.2% Fibonacci extension, around the 128 zone.  The overall technical backdrop remains supportive of further advance.  So it seems to us that this rally could rally XLK up to the next level of resistance at the 161.8% Fibonacci extension, just above 150.

The 2020 rising trend line, round 120, represents the logical level to measure risk against.  All bets are off should XLK close below that level.

Chart 1.2 – S&P 500 index (daily)

Short-term technical outlook remains bearish (sell).  Last changed December 22, 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”]

The big picture remains the same, S&P basing sideways using the lower boundary of the pink band as support.  That level was tested several times over the past months. Money Flow measure flashed a weak bearish signal as it trended higher from below the zero line, suggesting that the bears are more aggressive as prices dropped than the bulls were as prices ascended.

For now, the lower boundary of the pink band, around 3680, 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 3560, based on the trend channel moving average.

The December high, around 3725, acted as strong resistance.  A close above it is required to neglect the short-term sideways trading pattern.  With that said, there is no reason to turn particularly bullish until this area is eclipsed.

Short-term trading range: 3680 to 3780.  S&P has support near 3680.  Below it, a more significant support lies at the trend channel moving average, currently at 3560.  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 deteriorated as S&P’s testing support at the lower boundary of the pink band.  Technically speaking, the more often support is tested the weaker it becomes.  A failure to hold above key price level means that long-term buying pressure has finally been exhausted.  We’d turn particular bearish if the S&P closes twice below that level.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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