Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Thursday July 23, 2020.
We’ve noted in the previous Market Outlook that: “although overbought condition is keeping buyers at bay, S&P’s 3300 continues to act as price magnet.” As anticipated, S&P closed higher on Wednesday, rose 0.6 percent to 3,276.84, as late-buying in tech stocks and strength in defensive stocks boosted investor sentiment and offset rising U.S.-China tensions. The Dow Jones Industrial Average gained 0.6 percent to 27,005.84. The Nasdaq Composite added 0.2 percent to 10,706.13. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell more than 2 percent to 24.32.
Health care stocks attracted strong buying support amid news of a coronavirus vaccine deal between the U.S. government and Pfizer (PFE) and Biontech (BNTX), which are jointly developing a potential coronavirus vaccine. The U.S. agreed to pay Pfizer and German-partner BioNTech $1.95 billion to produce 100 million coronavirus vaccines if it proves to be safe and effective. The Department of Health and Human Services added the U.S. can acquire an additional 500 million doses of the drug under the agreement. As such, the Health Care Select Sector SPDR ETF (XLV) rose 0.90 percent on the day and is up about 5 percent YTD, outperformed the S&P. Now the question is what’s next? Below is an update look at a trade in XLV.
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 – Health Care Select Sector SPDR ETF (weekly)
Our “U.S. Market Trading Map” painted XLV bars in green (buy) – see area ‘A’ in the chart. XLV has been on a tear in recent weeks after the late May correction found some solid footing bear the 95 zone. This week’s upside follow-through confirmed last week’s breakout above the prior high set in early 2020, signify a bullish breakout and upside reversal. This is a positive development, opened up for a test of the 127.2% Fibonacci extension, around 128.
XLV has support near 95. 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 July 14, 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 continues drifting higher after breaking out above the early June congestion zone on Monday. This week’s rally pushed the index up against the lower boundary of the red band. As mentioned, the red zone indicated extreme overbought conditions. The normal behavior for the S&P has been to consolidate and retreated almost every time it traded above that level so there is a high probability that a significant consolidation pattern will again develop in this area
Nevertheless, Money Flow measure is at the highest level going back to early 2019, indicating a strong net demand for stocks. This certainly would argue that the path with least resistance remains to the upside.
Short-term trading range: 3200 to 3230. S&P has minor support near 3245. A close below that level will turn the short-term trend down and a retest of 3200 should be expected. Resistance is at the lower boundary of the red band, just above 3300. A breakout above that level has measured move to around 3375.
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, overbought conditions have returned on a daily 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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