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S&P At Key Juncture

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 Friday November 20, 2020.

We’ve noted in the previous Market Outlook that: “S&P broke key supports Wednesday, signify a bearish trend reversal.  While the near-term technical backdrops favors further short-term weakness, it will be important to monitor the retreat and rebound behaviors to determine whether breakouts are decisive.” As anticipated, stocks traded lower in early Thursday session after the Labor Department reported that 742,000 people filed for unemployment insurance in the week ended November 14, up 31,000 from the prior week, above economists’ forecasts for 707,000 claims. The market however, managed to overcome the early weakness and closed higher as stimulus appears to be back on the agenda on Capitol Hill at a time when the labor market is showing signs of weakness as Covid-19 cases continue to spike.    For the day, the S&P climbed 0.4 percent to 3,581.87 and the Nasdaq Composite advanced 0.9 percent to 11,904.71.  The Dow Jones Industrial Average gained 0.2 percent to 29,483.23.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell more than 3 percent to 23.11.

Consumer discretionary stocks, meanwhile, received a boost from a surge in L Brands (LB).  The stock rallied 18 percent following earnings that topped analyst estimates, underpinned by strong results at Bath & Body Works amid pandemic-fueled demand for soap and hand sanitizer.  As such, the Consumer Discretionary Select Sector SPDR Fund (XLY) rose 0.49 percent on the day and is up more than 23 percent YTD, outperformed the S&P.  Now the question is what’s next?  Below is an update look at a trade in XLY.

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 – Consumer Discretionary Select Sector SPDR Fund (weekly)

Our “U.S. Market Trading Map” painted XLY bars in green (buy) – see area ‘A’ in the chart.  XLY moved up to test resistance at the 154-155 zone after the mid-October correction found support near the 2020 rising trend line.  That level is significant in charting terms.  It was tested several times over the past months.  The overall technical backdrop remains supportive of further advance.  If XLY could hold above 150 then a move toward the 165 zone, or the 127.2% Fibonacci extension, should be easier to achieve.

The early November low, around 145, represents the logical level to measure risk against.  All bets are off should XLY close below that level.

Chart 1.2 – S&P 500 index (daily)

Short-term technical outlook remains bearish (sell).  Last changed November 18, 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”]

S&P rebounded nicely after recent pullback found support near the 3550 zone.  That level roughly corresponds with the lower boundary of the pink band.  Momentum indicator shifted higher from near the overbought, indicating an internal strength.  Money Flow measure hovers near the zero line, indicating a weak net demand for stocks.  This will continue negatively affect trading sentiment in the coming days.  Over the next few days, traders should monitor trading behavior as the 3600 zone is tested as resistance.  This level was tested several times over the past days.  Some aggressive traders might use this level like a magnet to sell.

Short-term trading range: 3470 to 3700.  S&P has support near 3550.  A failure to hold above that level has measured move to around 3470.  Resistance is around 3600.  A sustain advance above that level has measured move to around 3700.

Long-term trading range: 2750 to 3730.  S&P has support near 3200.  A failure to hold above that level has measured move to 3100.  The index has resistance near 3700.  A close above that level has measured move to 3900.

In summary, S&P is at key technical juncture.  Thursday’s recovery rally is testing formidable resistance at the 3600 zone.  The longer the index stay below that level, the more vulnerable it is to lower prices.

 

Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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