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S&P To Attract Buyers In Any Pullback Toward 3400

Editor’s note: this column was originally published on Capital Essence’s CEM News. It’s being republished as a bonus for the loyal readers. For more information about subscribing to CEM News, please click here.

 

Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Thursday October 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 overall technical backdrop remains positive so sell-off could be shallow because the sideline money will try to fight its way back into the market.”  As expected, stocks closed lower Wednesday but off intraday lows as Apple led a tech rebounded to lift investor sentiment after U.S. Treasury Secretary Steven Mnuchin dented hopes for further stimulus before the election.  The S&P gave up 0.7 percent to 3,488.67.  The Dow Jones Industrial Average was down 0.6 percent to at 28,514 and the Nasdaq Composite slid 0.8 percent to 11,768.73.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, rose less than 1 percent to 26.23.

Mnuchin said it would be “would be difficult” to reach a deal on the next round of coronavirus stimulus with U.S. House Speaker Nancy Pelosi before the November 3rd election, denting hopes for fiscal aid for Americans, small business, and airlines.  Some sectors of the market tied to the progress of the economy, however, sidestepped the market malaise, with materials and industrials trading above the flatline. As such, the Materials Select Sector SPDR Fund (XLB) rose 0.29 percent on the day and is up about 8 percent YTD, roughly inline 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 Fund (weekly)

Our “U.S. Market Trading Map” painted XLB bars in green (buy) – see area ‘A’ in the chart.  Over the past few weeks, XLB has been trending higher after the mid-September selloff found support near the 2020 rising trend line.  This week’s rally pushed the ETF up against the prior high.  The overall technical backdrop remains positive, providing support for further advance. Right now, the most important thing to watch is trading behavior near the 67 zone.  A close above that level on a weekly closing basis has measured move to around 77, or the 127.2% Fibonacci extension.

XLB has support near 64.  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 October 7, 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”]

Key technical development in Wednesday session was a clear break below the important sentiment 3500 mark.  That level was tested several times over the past weeks.  Momentum indicator trended lower from near overbought zone, suggesting further short-term weakness likely.  Wednesday’s selloff pushed the index slightly below the September rising trend line.  This is a short-term negative development, indicated that the index might have to go to a much lower level to attract new buyers.  S&P has a strong band of support between 3440 and 3400.  Not only that it is an important support, the overall technical backdrop remains positive so we believe that any dips toward 3400 are a buying opportunities rather than time to take profits and get out.

Short-term trading range: 3400 to 3600.  S&P has support around 3440.  A failure to hold above that level has measured move to around 3400.  Resistance is around 3500.  A sustain advance above that level has measured move to 3600.

Long-term trading range: 3100 to 3730.  S&P has support near 3200.  A failure to hold above that level has measured move to 3100-3000.  The index has resistance near 3600.  A close above that level has measured move to 3900.

In summary, an overbought pullback consolidation interrupted the multi-month rally in the S&P.  Although seemingly vulnerable to further short-term weakness, the overall technical backdrop remains positive so expect S&P to attract buyers in any pullback toward the 3400 zone.

 

Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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