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Breakout Brewing?

With the 3200-3230 support level holding strong on the S&P 500, we remain constructive over the intermediate-term as outlined in our 11/3/20 Compass. Considering current market dynamics we see eventual decisive breakouts as the most likely outcome for the major averages, which justifies our positive outlook. At the same time, with the S&P 500, Russell 2000, and Nasdaq 100 climbing 7-12% in just over a week and all three testing logical resistance, we believe there is potential for some near-term backing-and-filling. Continue to buy dips.

  • Testing Resistance. Both the S&P 500 and Russell 2000 hit new all-time intraday highs at the open yesterday (11/9/20), but this was met with selling pressure throughout the day as breakouts were rejected. Short-term levels we are watching on the S&P 500 include resistance at 3588 and support in the 3521-3547 range… see charts below.
  • Sector Relative Strength Rankings & Weighting Recommendations. Last week we noted that Energy was the only Sector in a downtrend — that is, until now. With bullish short-term price and RS reversals on cap- and equal-weighted Energy (XLE and RYE), we have the Sector on watch for a potential upgrade.
  • WTI Crude Oil; 10-Year Treasury Yield; US Dollar; Big EM Breakout. One reason we are hesitant to upgrade the Energy Sector is because WTI crude oil remains below important resistance at $41.50-42. Additionally, the 10-year Treasury yield is testing the important 0.95% resistance level; a breakout above this level would make cyclical value Sectors like Energy and Financials all the more attractive. The US dollar (DXY) is testing key support at 92; a break below this level would provide a risk-on signal for global equities and would be a tailwind for commodity prices. Speaking of risk-on signals, we are getting a big one from emerging market equities, as the EEM ETF displays a big breakout above $46.30 resistance.
s&p 500, russell 2000

Originally Published on November 10, 2020

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