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S&P In Short-term Overbought Correction But Downside Risk Limited

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Monday December 14, 2020.

We’ve noted in the previous Market Outlook that: “S&P traded in narrow trading range as we’re heading into the end of the year.  Technical pressures are building up as the market dances its way into an increasingly tight trading range. S&P’s 3630 marks the inflection point.  A failure to hold above key level indicates a change in sentiment and a much deeper pullback should be expected.”  As anticipated, S&P opened lower Friday, traded as low as 3,633 as negotiations over a coronavirus relief deal dragged on. Lawmakers seek to pass a bill before the end of 2020, but disagreements over state and local stimulus, unemployment assistance and stimulus checks still exist.

For the day, the bench mark gauge dipped 0.1 percent to 3,683.46.  The Nasdaq Composite dipped 0.2% to 12,377.87.  The Dow Jones Industrial Average outperformed rose 0.2 percent to 30,046.37.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, rose about 4 percent to 23.31.

Financials continued to slip amid the broader market malaise, paced by a more than 2 percent decline in Capital One (COF) and Citigroup (C).  Mastercard (MA), meanwhile, fell more than 1 percent after losing in its appeal to U.K. Supreme Court against an $18.5 billion class-action lawsuit that alleges the company overcharged more than 46 million customers.  As such, the Financial Select Sector SPDR ETF (XLF) fell 1.01 percent on the day and is down more than 7 percent YTD, underperformed the S&P.  Now the question is what’s next?  Below is an update look at a trade in XLF.

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 – Financial Select Sector SPDR ETF (weekly)

Our “U.S. Market Trading Map” painted XLF bars in green (buy) – see area ‘A’ in the chart.  XLF has been on a tear in recent weeks after breaking out above the 4-year moving average in early November.  That level was significant when the ETF fell below it in early 2020.  The rally tested resistance at the late February breakdown point.  Last week’s pullback suggested that the resistance would hold, at least for the time being.

The overall technical backdrop remains positive, so pullback should be short and quick.  With this in mind, we’d look to increase exposure into any pullback toward the 27 zone.

The 4-year moving average, just below 27, represents the logical level to measure risk against.  All bets are off should XLF close below that level.

Chart 1.2 – S&P 500 index (daily)

Short-term technical outlook remains bearish (sell).  Last changed December 9, 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”]

S&P retreated after the October rally ran out of steam near the lower boundary of the red band.  The index is now testing support at the lower boundary of the pink band, just above the 3600 zone.  That level was significant when the S&P climbed above it in early November. It’s now acting as strong support.

Momentum indicator trended lower from near overbought zone, suggesting further short-term weakness likely.  Money Flow measure is below the zero line, indicating a negative net demand for stocks.  These elements will continue negatively affect trading sentiment in the coming days.

While seemingly vulnerable to further short-term weakness, the bears will not have any cases unless they manage to push the S&P below 3600.  We’d turn particular bearish if the index closes twice below that level.

Short-term trading range: 3500 to 3735.  S&P has support near 3630-3600.  A failure to hold above 3600 indicated that long-term buying pressure has been exhausted and a much deeper pullback should be expected and we’re looking at 3500, based on the trend channel moving average.  Resistance is around 3680.  A sustain advance above that level has measured move to around 3735.

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, an overbought pullback consolidation interrupted the multi-month rally in the S&P.  Although seemingly vulnerable to further short-term weakness, the bears will not have any cases unless they manage to push the S&P below 3600.  We’d turn particular bearish if the index closes twice below that level.

 

Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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