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S&P To Draw In Buyers In Any Pullback Toward 3600

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Friday November 27, 2020.

Stocks closed mixed Wednesday after a record surge a day earlier, as a wobble in the jobs market in the wake of rising Covid-19 cases prompted investors to hit pause on value stocks.  The U.S Labor Department reported that 778,000 people filed for unemployment insurance, up 30,000 from the prior week’s 748,000, and well above expectations for 730,000 claims.  That was the second-consecutive week of rising claims for the first time since July 25, suggesting the impact of new restrictions in the parts of the U.S. and a lack of stimulus are taking a toll on the labor market.

The Dow Jones Industrial Average fell 0.6 percent to 29,872.47. The S&P dipped 0.2 percent to 3,629.65. The Nasdaq Composite outperformed, rising 0.5 percent to 12,094.40.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell nearly 2 percent to 21.25.

Tech stocks attracted strong buying support with Apple (AAPL) up nearly 1% on expectations for strong demand for its products ahead of the Holiday season.  As such, the Technology Select Sector SPDR Fund (XLK) rose 0.21 percent on the day and is up more than 33 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 Fund (weekly)

Our “U.S. Market Trading Map” painted XLK bars in green (buy) – see area ‘A’ in the chart.  The first dominant feature on the chart is the rising trend line starting in late March 2020.  The second dominant feature of the chart is the sideways trading pattern between 110 and 128, which represents the digestion period. The overall technical backdrop remains supportive of further advance.  Over the next few weeks, traders should monitor trading behavior as the 128 zone, or the 127.2% Fibonacci extension, is tested as resistance.  A sustain breakout above that level on a weekly basis signify that the sideways pattern has resolved itself into a new upswing with upside target near 157, based on the 161.8% Fibonacci extension.

The 2020 rising trend line, round 116, represents the logical level to measure risk against.  All bets are off should XLK 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”]

S&P retreated after recent rally attempt ran out of steam near the lower boundary of the red band, or extreme overbought zone. As mentioned, the normal behavior for the S&P has been to consolidate and retreated almost every time it traded above that level so there is a high probability that a significant consolidation pattern will again develop in this area.

Momentum indicator shifted lower from near overbought zone, increases the probability for a test of support near the 3600 zone. Money Flow measure hovers above the zero line, indicating a positive net demand for stocks.  With this in mind, we’d look to increase exposure into any pullback toward the 3600 zone in anticipation of a substantial recovery rally.

Short-term trading range: 3500 to 3700.  S&P has support near 3600.  A failure to hold above that level has measured move to around 3500.  Resistance is around 3650.  A sustain advance above that level has measured move to the low 3700s.

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, Wednesday’s bearish trading action suggested that the S&P shifted to short-term overbought consolidation phase.  The overall technical backdrop remains positive so expect the index to draw in buyers in any pullback toward the 3600 zone.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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