Tag Archives: SPX

Extreme Oversold Relief Rally Could Take S&P Closer To 2900 Before Significant Pullback Unfolds

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Thursday April 9, 2020.

We’ve noted in the previous Market Outlook that: “Tuesday’s bearish shooting star candlestick together with the lagging Money Flow measure suggesting that an important near-term high has been established.  While there’s a high probability that the late-day selloff will momentum but an undercut below the 2650 is needed before there is any real prospect of a change in the short-term uptrend pressure.”  As anticipated, S&P closed higher Wednesday, recovered all of the prior session losses as hopes the U.S. may turn a corner in its battle against the coronavirus as early as next week and a rally in energy prompted traders to up their bullish bets on stocks.  For the day, The S&P climbed 3.4 percent to 2,749.98 while the Nasdaq Composite advanced 2.6 percent to 8,090.90.  The Dow Jones Industrial Average gained 3.4 percent to 23,433.57.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell more than 7 percent to 43.35.

Crude prices jumped, giving energy stocks a lift. West Texas Intermediate futures rose 6.2 percent to settle at $25.09 per barrel. Energy was among the best-performing sectors in the S&P, jumping more than 6 percent.  As such, the Energy Select Sector SPDR ETF (XLE) surged 6.67percent on the day but is down 43 percent YTD, underperformed the S&P.  Now the question is whether the rally has more legs?  Below is an update look at a trade in XLE.

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 – Energy Select Sector SPDR ETF (weekly)

Our “U.S. Market Trading Map” painted XLE bars in green (buy) – see area ‘A’ in the chart.  Over the past few weeks, XLE has been trending higher in a short-term corrective mode after the early 2020 selloff found support just below 23.  This week’s rally pushed the ETF above the short-term falling trend line, signify a bullish breakout and upside reversal.  This is a near-term positive development, opened up for a test of the more important resistance near the 40 zone.

XLE has support near 30.  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 bullish (buy).  Last changed April 6, 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”]

Once again, the S&P moved up to test resistance at the 23.6% Fibonacci retracement, near 2750, after Tuesday selloff found support near the later March recovery high.  This is a positive development, increased the probability for a breakout above 2750 and a rapid advance toward the trend channel moving average, just above 2900.  Technical speaking, if prices meets a falling resistance on its way up, there is a good chance that the price will fall back.  Perhaps the lagging Money Flow measure is the best illustration of the bear’s case.  With that in mind, we’d look to reduce exposure into short-term strength, which might take the S&P closer to 2900 before a significant pullback unfolds.  A close above 2750 will confirm this.

For now, the bulls will continue to have the benefit of the doubts as long as the S&P holds above 2650.   A failure to hold above that level has measured move to around 2515.

For now, 2750 represents key resistance.  Consecutive close above that level will open up for a test of the more important resistance around the 2880-2920 zone.

Short-term trading range: 2650 to 2880.  S&P has support near 2650.  A failure to hold above that level has measured move to around 2560.  The index has resistance near 2750.  A breakout above that level has measured move to around 2880-2920.

Long-term trading range: 2190 to 2950.  S&P has support near 2190.  A failure to hold above that level has measured move to 1700.  The index has resistance near 2600.  A close above that level has measured move to 2950.

In summary, Wednesday’s rally pushed the S&P up against the formidable resistance near the 2750 zone.  As for strategy, we’d look to reduce exposure into short-term strength, which might take the S&P closer to 2900 before a significant pullback unfolds.

 

Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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