Fri, June 26, 2020 | 5:59PM ET

Market Nearing Important Support Levels and Inflection Point

Name: FS Insight
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Managing Director and Technical Strategist

Equity markets are nearing another important inflection point at support levels, as short-term momentum indicators become oversold. In last week’s note, I discussed the importance of short-term momentum indicators to help track the 2-4 week shifts that capital markets regularly move through.

After surging from oversold levels on May 15 to overbought levels on June 8, most stock markets have been in choppy sideways trading ranges, but they remain above key support near rising 50-day moving averages. As equities have pulled back, daily momentum indicators have been steadily moving from overbought levels in early June back to oversold levels heading into the end of this quarter.

My expectation is that markets are likely to carve out short-term lows in the coming days, but it is premature to state a bottom is in place yet. Short-term downtrends remain in place from the June 8 rally high and will need to be reversed to the upside to state the bottom is in.

The financials will be one of the more important barometers for the market overall in the coming weeks given it has been leading to the downside from the June 8 and is now absorbing the fallout from the Fed’s decision to cap dividends and buybacks. (For more see page 12.) Similar to most cyclicals, the financial sector appears is oversold short-term but has yet to reverse its June downtrend to signal a bottom has been completed.

Market Nearing Important Support Levels and Inflection Point

This week’s chart above reviews the XLF Financial sector ETF to focus in on what levels are important in the coming week. Friday’s break below the 50-day moving average at 22.99 and the June 15 lows at 22.96 is a concern and reinforces the sectors ongoing correction.

However, with the daily momentum increasingly oversold, it is likely the sector is in the late stages of a correction and downside should be limited. Next support is at the low end of the May 22 gap coincidently at 22. A move back above the 50-dma would be an encouraging first step but a move above Wednesday’s highs at 23.64 is needed to signal a reversal of the June downtrend and probable beginning of another upside move with next resistance between the 200-dma at 26.68 and June 8 highs at 26.79.

Figure: Weekly Sector Review
Source: FS Insight, Factset

Figure: Best and worst performance sectors over past 3 months

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