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Look To Increase Exposure Into Short-term Market Dips Rather Than Chasing Breakouts

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 Tuesday November 17, 2020.

We’ve noted in the previous Market Outlook that: “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.”  As anticipated, S&P closed at record highs Monday, climbed 1.2 percent to 3,626.91, as positive Covid-19 vaccine news from Moderna sparked a rally in value on stocks on hopes of a quicker recovery.  The Dow Jones Industrial Average gained 1.6 percent to 29,950.44.  The Nasdaq Composite advanced 0.8 percent to 11,924.13.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell about 3 percent to 22.45.

Airlines, banks and cruise operators – sectors hit hard by the pandemic amid global restrictions to curb the virus – racked up gains, propelling the broader market higher.  Delta Air Lines (DAL), United Airlines (UAL) and American Airlines Group (AAL) closed higher, with the latter up 5 percent.  As such, the U.S. Global Jets ETF (JETS) jumped 3.77 percent on the day but is down about 34 percent YTD, underperformed the S&P.  Now the question is what’s next?  Below is an update look at a trade in JETS.

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 – U.S. Global Jets ETF (weekly)

Our “U.S. Market Trading Map” painted JETS bars in green (buy) – see area ‘A’ in the chart.  Over the past few weeks, JETS has been trending higher after the mid-June correction found support near the 2020 rising trend line.  Last week’s rally pushed the ETF above the closely watch 20 zone, or the 38.2% Fibonacci retracement.  Right now the most important thing to watch is trading actions near the 23 zone, or the June recovery high and the 50% Fibonacci retracement.  A sustain advance above that level will confirm last week’s bullish breakout signal and trigger acceleration toward the 26 zone, or the 61.8% Fibonacci retracement.

The 2020 rising trend line, around 18, represents the logical level to measure risk against.  All bets are off should JETS close below that level.

Chart 1.2 – S&P 500 index (daily)

Short-term technical outlook remains bullish (buy).  Last changed November 13, 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”]

S&P continues drifting higher after recent pullback found support near the important sentiment 3500 mark. This week’s rally pushed the index above the lower boundary of the red band.  As mentioned, a trade above that level 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 above the zero line, indicating a positive net demand for stocks.  This certainly would argue that the path with least resistance remains to the upside.

Short-term trading range: 3500 to 3700.  S&P has support near 3600.  A failure to hold above that level has measured move to around 3500.  Resistance is around 3690-3700.  A sustain advance above that level has measured move to 3800.

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, while overbought conditions have returned on a daily basis, the overall technical backdrop 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, traders should look to increase exposure into short-term market dips rather than chasing breakouts.

 

Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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