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S&P Short-term Overbought But Momentum Remains Supportive

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Thursday July 16, 2020.

Stocks ended higher on Wednesday, following promising early data for a potential COVID-19 vaccine and a strong quarterly report from Goldman Sachs (GS).  Moderna Inc. (MRNA) jumped 6.9 percent after reporting that its coronavirus vaccine candidate, mRNA-127, produced antibodies in patients aged 18 to 55, suggesting the treatment could protect against infection by the virus.  The Dow Jones Industrial Average rose 0.9 percent to 26,870.10. The S&P added 0.9 percent to 3,226.56. The Nasdaq Composite gained 0.5 percent to 10,550.49.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell 6 percent to 27.76.

Stocks directly tied to an economic reopening jumped following the vaccine news. Gap jumped 12.7 percent and Kohl’s gained more than 9 percent.  As such, the SPDR S&P Retail ETF (XRT) rose 3.25 percent on the day but is down more than 1 percent YTD, underperformed the S&P.  Now the question is what’s next?  Below is an update look at a trade in XRT.

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 – SPDR S&P Retail ETF (weekly)

Our “U.S. Market Trading Map” painted XRT bars in green (buy) – see area ‘A’ in the chart. Over the past few weeks, XLF has been basing sideways using the late May breakout point as support after the March rally ran out of steam near the 2018 falling trend line, a key technical level.  This week’s rally pushed the ETF above the 2018 falling trend line resistance and the prior high set in early June, signify a bullish breakout and upside reversal.  This is a positive development, opened up for a test of the 2018 high, around 53.  A close above 45 on a weekly closing basis will confirm this.

XRT has support near 42.  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 July 14, 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, S&P moved up to test resistance at the early June congestion zone, between 3190 and 3230, after recent selloff was met with a new wave of buying interest.  This is a positive development but let’s notice that the normal behavior for the S&P has been to consolidate and retreated almost every time it traded near that level. Adding to concerns is the short-term overbought conditions.  Near-term, there is a high probability that a significant consolidation pattern will again develop around the 3230 zone.

For now, the early June congestion zone, between 3190 and 3230, acted as strong resistance.  A close above it is required to neglect the short-term sideways trading pattern.  With that said, there is no reason to turn particularly bullish until this area is eclipsed.

On the downside, 3100 is the line in the sand.  That level was significant when the index climbed above it in late June.  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.

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, while overbought might put a cap on the upside the overall technical backdrop remains supportive so downside risk could be limited. It is possible that S&P could continue to drift higher as trading sentiment remains strong.  As for strategy, traders should look to increase exposure into short-term market dips rather than chasing breakouts.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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