Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Wednesday December 9, 2020.
We’ve noted in the previous Market Outlook that: “S&P developed a high volatility with fast up and down moves near the lower boundary of the red band. While market seems vulnerable to some downside retracement over the short-term, we’re long-term positive for S&P as we believe selloff would be shallow and quick.” As anticipated, S&P traded lower in early Tuesday session amid growing concerns that U.S. employment growth continues to slow down and the number of Covid-19 cases keeps rising. The bench mark gauge however, managed to overcome the early weakness and closed higher, rose 0.3 percent to 3,702.25. The Dow Jones Industrial Average gained 0.4 percent to 30,173.88. The Nasdaq Composite climbed 0.5 percent to 12,582.77. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell nearly 3 percent to 20.68.
Equifax (EFX) surged 8 percent after the consumer credit reporting company received an upgrade from Barclays (BARC) to overweight from underweight. As such, the Industrial Select Sector SPDR ETF (XLI) climbed 0.5 percent on the day and is up about 10 percent YTD, slightly underperformed the S&P. Now the question is what’s next? Below is an update look at a trade in XLI.
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 – Industrial Select Sector SPDR ETF (weekly)
Our “U.S. Market Trading Map” painted XLI bars in green (buy) – see area ‘A’ in the chart. There is a distinct possibility that a small triangle pattern is currently setting up in the weekly chart of XLI. Over the past few weeks, XLI has been basing sideways near the 90 zone as it works off overbought conditions after the early November rally pushed the ETF above the prior high set in early 2020. The overall technical backdrop remains supportive of further advance. Right now the most important thing to watch is trading behavior as the 90 zone is tested. A close above that level on a weekly closing basis suggested that the late November triangle pattern has resolved itself into a new upswing with upside target around 105, or the 127.2% Fibonacci extension.
The early 2020 high, around 85, represents the logical level to measure risk against. All bets are off should XLI close below that level.
Chart 1.2 – S&P 500 index (daily)
Short-term technical outlook remains bullish (buy). Last changed November 24, 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”]
Key technical development in Tuesday trading session was a close above the important sentiment 3700 mark. That level was tested several times over the past week. The bullish breakout would be confirmed on another close above 3700 this week, which would support upside follow-through and a test of resistance at the red band, currently at 3735-3850. As mentioned, the normal behavior for the S&P has been to consolidate and retreated almost every time it traded above the lower boundary of the red band so there is a high probability that a significant consolidation pattern will again develop in this area. Additionally, overbought conditions has returned on an intraday basis so it should not be surprising to see some backings and fillings in the coming days.
Short-term trading range: 3620 to 3735. S&P has support near 3685-3662. A failure to hold above that level has measured move to around 3620. 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 3475, based on the trend channel moving average. Resistance is around 3735. A sustain advance above that level has measured move to around 3850.
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, S&P cleared key resistance, breaking out above the important sentiment 3700 mark. Consecutive close above 3700 this week would confirm Tuesday’s bullish reversal signal, supporting upside follow-through in the days ahead. However, market is short-term overbought following recent advance. There could be a sell-off in the offing but it would be shallow if so.
Thanks and happy trading.
(By：Michelle Mai for Capital Essence)
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