Tag Archives: XLF

S&P In Digestion 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 Wednesday April 1, 2020.

We’ve noted in the previous Market Outlook that: “S&P shifted to holding pattern as traders wondered whether more gains are warranted given the massive advance over the past week.  While we remain near term bullish on the S&P, we believe that the market needs some sorts of positive catalysts to build up the needed energy for a new leg higher.”  As anticipated, S&P traded higher in early Tuesday session before a wave of late selling hit, leading the bench mark gauge to its worst ever first quarter amid worries the widely-expected recession in the U.S. may be worse than feared as the Covid-19 pandemic intensified.

For the day, the S&P dropped 1.6 percent to 2,584.59. The Nasdaq Composite fell nearly 1 percent to 7,700.10.  The Dow Jones Industrial Average fell 1.8 percent to 21,917.16.   The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell more than 6 percent to 53.54.

Bank stock such as JPMorgan Chase, Citigroup and Bank of America continued to drop, down 3 to 4 percent. The stocks have been under big pressure this week from declining rates.  As such, the Financial Select Sector SPDR ETF (XLF) fell 2.76 percent on the day and is down more than 32 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 red (sell) – see area ‘A’ in the chart.  XLF tumbled out of gate after the 2019 rally ran out of steam just above 31.  The February massive selloff found some support near the 50% Fibonacci retracement of the 2009-2020 major upswing.  The March recovery rally tested resistance at the 38.2% Fibonacci retracement.  This week’s bearish trading action suggested that the resistance would hold, at least for the time being, and a retest of the March low, around 18, should be expected.  That level is significant in charting terms.  A failure to hold above it has measured move to around 15, or the 61.8% Fibonacci retracement.

XLF has resistance near 22.  Short-term traders could use that level as the logical level to measure risk against.

Chart 1.2   – S&P 500 index (weekly)

Short-term technical outlook remains bullish (buy).  Last changed March 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”]

The big picture remains the same. There is a consolidation near the upper boundary of the green band which represents the digestion period in the aftermath of the March oversold relief rally. As mentioned, the main event here is the upward push against the upper boundary of the green band.  That level was significant when the index fell below it in late February.   Money Flow measure hovers around the lowest level going back to late 2018, indicating a negative net demand for stocks.  Momentum has been strengthened over the past few days but does not appeared strong enough to fuel a significant push upward from here.  These elements suggested further backings and fillings likely.

For now, 2650 represents key overhead resistance.  If the market is going to find bottom in the near term, we want to see the S&P stabilizes and climbs above 2650.  Staying below that level heralds more losses.  With that said, a weekly close above 2650 will turn the medium-term trend up and trigger acceleration toward the 2900 zone.

Short-term trading range: 2465 to 2680.  S&P has support near 2465.  A failure to hold above that level has measured move to around 2200.  The index has resistance near 2650.  A breakout above that level has measured move to around 2900.

Long-term trading range: 2000 to 3000.  S&P has support near 2260.  A failure to hold above that level has measured move to 2000.  The index has resistance near 2600.  A close above that level has measured move to 2900.

In summary, the big picture remains the same. There is a consolidation near the upper boundary of the green band, which represents digestion period.  S&P’s 2650 is the line in the sand.  If the market is going to find bottom in the near term, we want to see the S&P stabilizes and climbs above 2650.  Staying below that level heralds more losses.

 

Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

© All rights reserved and actively enforced.
Note: This is a free edition of The Market Outlook, a daily CEM News subscriber newsletter. To get this column before market opens together with hundreds of technical trading ideas (including stocks and ETFs) every month, please click here.
Subscribe to CEM News to receive more in-depth research from Capital Essence.