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S&P Bottoming Process Will Take More Time

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Thursday October 29, 2020.

Stocks fell sharply on Wednesday amid concerns over the latest increase in coronavirus infections and its potential impact on the global economy.  France and Germany announced new lockdown measures starting Friday and Monday, respectively, with bars and restaurants set to shut while schools will remain open, as both countries strive to curb a sharp rise in Covid-19 infections.  In the U.S., meanwhile, there are signs some areas are considering rolling back the easing of lockdown measures after Chicago prohibited indoor dining.

For the day, the Dow Jones Industrial Average dropped 3.4 percent to 26,519.95. The S&P slid 3.5 percent to 3,271.03, while the Nasdaq Composite fell 3.7 percent to 11,004.87.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, rose more than 2 percent to 33.14.

With the impact of the pandemic gathering pace, cyclical stocks, those linked to the economy, also played a meaningful role in the selloff, with consumer discretionary and energy among the biggest decliners.  Energy fell 4 percent, led by a sharp decline in oil prices as data showing a larger-than-expected weekly build in U.S. inventories exacerbated concerns about the demand outlook.  The Consumer Discretionary Select Sector SPDR Fund (XLY) tumbled 3.16 percent on the day and but up about 16 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 red (sell) – see area ‘A’ in the chart.  Over the past few weeks, XLY has been trending lower in a short-term corrective mode after the late September rally ran out of steam just above the prior high set in early September. This week’s massive selloff is testing support at the 2020 rising trend line, around 142.  That level was tested several times over the past months.  If XLY could hold above it then a retest of the September high would be easier to achieve.

XLY has resistance around 156.  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 bearish (sell).  Last changed October 26, 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”]

As expected, S&P moved down to test support at the bottom of its short-term trading range after falling below the trend channel moving average, the level that offered support since the index broke out in September.  Money Flow measure fell below the zero line, indicating a negative net demand for stocks.  Wednesday’s selloff pushed the S&P below the important sentiment 3300 mark.  These negative developments suggested that the index might have to move to a much lower level to attract new buyers.

If the market is going to find bottom in the near term, we want to see the S&P establishes some trading ranges and climbs above 3300.  Staying below that level heralds more losses.

Short-term trading range: 3230 to 3500.  S&P has support around 3230.  A failure to hold above that level has measured move to around 3140.  Resistance is around 3400-3450.  A sustain advance above that level has measured move to 3500.

Long-term trading range: 3150 to 3730.  S&P has support near 3350.  A failure to hold above that level has measured move to 3150.  The index has resistance near 3600.  A close above that level has measured move to 3900.

In summary, Wednesday’s bearish break below the important sentiment 3300 mark on the S&P suggested that bottoming process will take more time and probably inflict more damage to stocks.  While there seems to be room to go lower, the selloff is overextended so it should not be surprised to see at least an attempt to rally in the coming days.  However, given the damages done over the past days, rebound should be short-lived.  If the market is going to find bottom in the near term, we want to see the S&P establishes some trading ranges and climbs above 3300.  Staying below that level heralds more losses.

 

Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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