Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Tuesday July 28, 2020.
We’ve noted in the previous Market Outlook that: “with prices stretching out to the level that have not seen since the COVID-19 “great lockdown” started, temptation to take some money off the table is on a rise amid a growing sense that stocks might be running ahead of fundamentals. However, as last week’s trading action suggested, nobody wants to do too much too soon. So, while sitting on the overcrowded bullish bandwagon, we’ll begin to watch for the exit.” As anticipated, stocks closed higher on Monday as investors bet on some of the market’s most high-profile stocks ahead of earnings reports while they weighed progress in U.S. government stimulus efforts against rising U.S. COVID-19 cases. For the day, the Dow Jones Industrial Average gained 0.4 percent to 26,584.77. The S&P added 0.7 percent to 3,239.41 and the Nasdaq Composite outperformed, climbing 1.7 percent to 10,536.27. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell more than 4 percent to 24.74.
Health care stocks got a strong boost after the U.S. government allocated an additional $472 million towards Moderna’s coronavirus vaccine research. The stock jumped 9.2 percent. As such, the Health Care Select Sector SPDR ETF (XLV) rose 0.75 percent on the day and is up about 4 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. After dropping about 40 percent from its February high, near 270, and met the anticipated support at the 38.2% Fibonacci retracement of the 2009-2020 major upswing, XLV had retraced all of the massive lost and some more, breaking out above the February high around mid-July. Over the past few weeks, XLV has been basing sideways using the 105 zone as support as it works off overbought conditions. The fact that the ETF managed to hold on to most of the March-June massive gain is impressive, suggesting that XLV will move up to test the 127.2% Fibonacci extension, near 128, as soon as it shakes off excessive optimism.
XLV has support near 102. 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 July 23, 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”]
The big picture pretty much the same. The S&P continues basing sideways using the lower boundary of the pink band as support after the late June rally ran out of steam near the lower boundary of the red band. The fact that the index managed to hold on to most of recent gains despite overbought conditions is impressive. This certainly would argue that the near-term risk remains to the upside. Perhaps the positive Money Flow measure is the best illustration of the bulls’ case. With that said, until proven otherwise, last week’s selloff is merely a short-term correction which is taking place within a context of an intermediate term upswing. As for strategy, we’d look to increase exposure into short-term market dips.
Over the next few days, the most important thing to look for is a test of support at 3200. A close below that level signals a medium-term correction with target around 3100.
Short-term trading range: 3200 to 3230. S&P has a strong band of support around 3200-3190. A close below that level will turn the short-term trend down and a retest of 3100 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, S&P could continue to drift higher going into the end of the month as trading sentiment remains strong. The near-term technical outlook however, remains negative, suggesting that this is not a time to accumulate stocks aggressively.
Thanks and happy trading.
(By：Michelle Mai for Capital Essence)
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