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S&P Shifted To Short-term Consolidation Phase

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Wednesday December 23, 2020.

We’ve noted in the previous Market Outlook that: “market internals had been weakened as S&P moved down to test support at the lower boundary of the pink band.  The longer the index stays near that level, the more vulnerable it is to lower prices.  This is the real danger in the current market.”  As anticipated, the S&P closed lower Tuesday, dipped 0.2 percent to 3,687.26, as signs the consumer is in fragile shape during the crucial holiday period weighed on sentiment and overshadowed the approval of the $900 billion stimulus package on Capitol Hill.  The Dow Jones Industrial Average slipped 0.7 percent to 30,015.51. The Nasdaq Composite outperformed, rose 0.5 percent to 12,807.92.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell more than 3 percent to 24.23.

Sentiment on risk was also soured by ongoing concerns a mutant strain of Covid-19 identified in the U.K. could already be in the U.S., raising fears over fresh restrictions and sending travel-related stocks lower.  Delta Air Lines (DAL), American Airlines (AAL) and United Airlines Holdings (UAL) were down more than 2 percent.  As such, the iShares Transportation Average ETF (IYT) fell 0.21 percent on the day but is up more than 12 percent YTD, slightly underperformed the S&P.  Now the question is what’s next?  Below is an update look at a trade in IYT.

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 – iShares Transportation Average ETF (weekly)

Our “U.S. Market Trading Map” painted IYT bars in red (sell) – see area ‘A’ in the chart. Over the past few weeks, IYT has been trending lower in a short-term corrective mode after the early November rally ran out of steam just below the 230 zone.   The correction is testing support at the 2020 rising trend line.  The near-term technical outlook skews toward further weakness. Over the next few weeks, it’d be important to monitor trading behaviors as the 215-210 zone is tested as support.  A failure to hold above that level will bring the 180 zone, or the 1-year moving average, into view.

The early December high, just below 230, represents the logical level to measure risk against.  All bets are off should IYT close above that level.

Chart 1.2 – S&P 500 index (daily)

Short-term technical outlook shifted to bearish (sell).  Last changed December 22, 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”]

Once again, S&P retreated after recent rally attempt ran out of steam near the important sentiment 3700 mark. That level was retested in several times over the past weeks.  This history indicated an important role in terms of resistance.  Market internal has been deteriorated following recent setback but downside momentum does not appeared strong enough to generate widespread breakouts.  With that said we wouldn’t read too much into Tuesday trading action as it keeps the S&P within its short-term consolidation phase.

Over the next few days, the most important thing to watch is the retreat and rebound behaviors as the lower boundary of the pink band, currently at 3670, is tested as support. That level was significant when the index climbed above it in November.  When strong support is broken it means that near-term buying pressure has finally been exhausted.  With that said, a close below 3670 is outright bearish and a much deeper pullback should be expected and we’re looking at 3555, based on the trend channel moving average.

For now, the December high, around 3725, acted as strong resistance.  A close above it is required to neglect the short-term sideways trading pattern.  With that said, there is no reason to turn particularly bullish until this area is eclipsed.

Short-term trading range: 3670 to 3780.  S&P has support near 3670.  Below it, a more significant support lies at the trend channel moving average, currently at 3555.  Resistance is around 3780.  A sustain advance above that level has measured move to around 3900.

Long-term trading range: 3200 to 3800.  S&P has support near 3200.  A failure to hold above that level has measured move to 2900.  The index has resistance near 3800.  A close above that level has measured move to 4100.

In summary, S&P shifted to short-term consolidation phase that reflects an indecisive market.  While near-term risk is greater to the downside, markets are volatile and traders may prefer not to hold large positions overnight.

 

Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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