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S&P In Short-term Consolidation Phase

Editor’s note: this column was originally published on Capital Essence’s CEM News. It’s being republished as a bonus for the loyal readers. For more information about subscribing to CEM News, please click here.

 

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

We’ve noted in the previous Market Outlook that: “the late June rally is showing signs of buyer’s fatigue, noting a struggle for the S&P to get far past the early June congestion zone.”  As anticipated, S&P swung between gains and losses on Wednesday as investors continued to back tech while sectors tied to the progress of the economy faltered amid rising Covid-19 cases.  The bench mark gauge closed higher as late-buying swept through Wall Street, led by tech, up 0.8 percent to 3,169.94 and the Nasdaq Composite advanced 1.2 percent to 10,492.50, notching a record closing high.  The Dow Jones Industrial Average rose 0.7 percent to 26,067.28.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell nearly 5 percent to 28.08.

A surge in tech stocks powered the broader market higher.  Apple (AAPL) closed at all-time highs as Wall Street continued to back the stock on signs of a strong rebound in sales.  Twitter (TWTR), surged 7 percent as investors cheered signs that the company is taking steps to boost sales.  As such, the Technology Select Sector SPDR ETF (XLK) rose 1.63 percent on the day and is up about 18 percent YTD, outperformed the S&P.  Now the question is what’s next?  Below is an update look at a trade in XLK.

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 – Technology Select Sector SPDR ETF (weekly)

Our “U.S. Market Trading Map” painted XLK bars in green (buy) – see area ‘A’ in the chart.  Over the past few weeks, XLK has been basing sideways near the 100 zone as support as it worked off overbought conditions.  This week’s upside follow-through confirmed last week’s breakout above the one-month sideways trading pattern, signify a bullish breakout and upside reversal. This is a positive development, opened up for a test of the 126 zone, or the 127.2% Fibonacci extension.

XLK has support near 100.  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 June 30, 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 rebounded nicely after the early selloff attempt found some solid footing near the lower boundary of the pink band.  That level was tested several times over the past days.  Market internal has strengthened but upside momentum does not appeared strong enough to generate widespread breakouts.  So we wouldn’t read too much into Wednesday trading action as it keeps the S&P within its short-term consolidation phase.

For now, 3100 is the line in the sand.  That level was significant when the index climbed above it last week.  When strong support is broken it means that near-term buying pressure has finally been exhausted.  With that said, a close below 3100 is outright bearish and a much deeper pullback should be expected and we’re looking at 3000-2900.

On the upside, there is a strong band of resistance between 3190 and 3230 zone, or the early June breakdown point. There is no reason to turn particularly bullish until this zone is eclipsed.

Short-term trading range: 3100 to 3230.  S&P has a strong band of support near 3100.  A failure to hold above that level has measured move to around 3000.  There is a strong band of resistance between 3190 and 3230.  A breakout above that level has measured move to around 3300.

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, we wouldn’t look too much into recent trading action as because it keeps the S&P within its short-term consolidation phase. Resistance is strong near the early June congestion zone and upside momentum does not appear strong enough to generate a decisive breakout.

 

Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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