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S&P Constrained By Short-term Sideways Trend

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Friday July 10, 2020.

We’ve noted in the previous Market Outlook that: “we wouldn’t look too much into recent trading action as because it keeps the S&P within its short-term consolidation phase. Resistance is strong near the early June congestion zone and upside momentum does not appear strong enough to generate a decisive breakout.”  As anticipated, S&P closed lower Thursday, slid 0.6 percent to 3,152.05, as investors worried about another round of business shutdowns to contain a surge in coronavirus cases and began to shift their focus to earnings.  The Dow Jones Industrial Average dropped 1.4 percent to 25,706.09.  The Nasdaq Composite posted a record, rising 0.5 percent to 10,547.75. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, jumped more than 4 percent to 2819.26.

Energy led Thursday selloff, paced by a decline oil prices as the pause of reopening measures in pockets of the U.S. offset signs of a recovery in gasoline demand seen a day earlier.  As such, Energy Select Sector SPDR ETF (XLE) tumbled 4.94 percent on the day and is down about 43 percent YTD, underperformed the S&P.  Now the question is what’s next?  Below is an update look at a trade in XLE.

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 – Energy Select Sector SPDR ETF (weekly)

Our “U.S. Market Trading Map” painted XLE bars in red (sell) – see area ‘A’ in the chart.  Over the past few weeks, XLE has been trending lower after the March oversold bounce ran out of steam near the closely watch 46-zone, or the 38.2% Fibonacci retracement of the 2018-2020 downswing.  This week’s selloff pushed the ETF below the 36 zone, or the 23.6% Fibonacci retracement, signify a bearish breakout and downside reversal.  This is a negative development, increased the probability for a retest of the March low, around 23.  A close below 36 on a weekly closing basis will confirm this.

XLE has resistance near 38.50.  Short-term traders could use that level as the logical level to measure risk against.

Chart 1.2 – S&P 500 index (daily)

Short-term technical outlook remains bullish (buy).  Last changed June 30, 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”]

Once again, the S&P moved down to test support at the important sentiment 3100 mark after Wednesday’s rally attempt ran out of steam near the early June congestion zone.  That level was tested several times over the past days.  Momentum indicator shifted lower from near overbought zone, suggesting further short-term weakness likely.  Nonetheless, Money Flow measure hovers near the highest level going back to early 2019, indicating a positive net demand for stocks.  This could help putting a short-term floor under the market.

Right now the most important thing to watch is the rallies and retreats behavior as the early June congestion zone, between 3190 and 3230, is tested as resistance.  A close above it is required to neglect the short-term sideways trading pattern.  There is a no reason to turn particularly bullish until this area is eclipsed.

On the downside, 3100 is the line in the sand.  That level was significant when the index climbed above it last week.  When strong support is broken it means that near-term buying pressure has finally been exhausted.  With that said, a close below 3100 is outright bearish and a much deeper pullback should be expected and we’re looking at 3000-2900.

Short-term trading range: 3100 to 3230.  S&P has a strong band of support near 3100.  A failure to hold above that level has measured move to around 3000.  There is a strong band of resistance between 3190 and 3230.  A breakout above that level has measured move to around 3300.

Long-term trading range: 2190 to 3600.  S&P has support near 3000.  A failure to hold above that level has measured move to 2700.  The index has resistance near 3300.  A close above that level has measured move to 3600.

In summary, trading behavior in the S&P remains constrained by a short-term sideways pattern and shown little evidence of a sustainable change in trend.  3100 is the line in the sand.  A close below that level is outright bearish and a much deeper pullback should be expected.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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