Has the market bottomed out?

The stock market in the US has been extremely bullish in the past 1.5 months. Actually, the main reason for that was the fact that investors saw the great market correction caused by the coronavirus pandemic as an amazing opportunity to start buying stocks at a huge discount. In fact, most of the biggest companies out there made corrections of between 30% and 70% in a month between the middle of February and the 20th of March, which represented a huge sell-off on the market that hadn’t been seen since the financial crisis of 2008.

Our stock and ETF analyses back in March clearly forecasted the great potential reversal from the low levels the market had reached back then and we were signaling for a strong buying activity at those levels.

Since then, we have seen most of the biggest companies out there make very strong bullish rallies of around 30-40% and signaling that the market has bottomed out already and investors have realized that those great corrections that have occurred have given them a great opportunity for owing leading companies with proven market positioning and a solid financial performance at a huge discount, giving them an opportunity to make high profits as the market starts reversing again.

We at Dow Experts always base our analysis on both fundamental and technical factors that have an impact on the different stocks, ETFs and indices out there.

For example, we believe the fundamental factors, such as economic reports and events, political factors, healthcare issues, companies announcing their new products and services, as well as delivering their quarterly financial statements are of utmost importance when it comes to being able to come up with the most complete and thorough analysis on the different instruments we are looking at.
Furthermore, we use the power of technical analysis in order to examine the different patterns and price movements on the chart, such as trend lines, support and resistance lines and different price continuation and reversal figures, and that in a combination with the technical indicators give us an opportunity to determine the right levels at which we should buy or sell a given stock or ETF in order to maximize our profit potential.

Today’s analysis will focus on the 10-year positive correlation between the SPDR S&P 500 ETF Trust (SPY) and the Consumer Discretionary Select Sector SPDR Fund (XLY), which stands at 93%. We will also be looking at some of the biggest companies within the two ETFs and examine their latest performance in order to come up with some potential buying ideas at the significant corrections that have been taking place lately.

The SPY is the best-recognized and oldest ETF out there that tops rankings for the largest amount of assets under management and greatest trading volume.

The fund tracks the most popular US Index, the S&P 500 and invests in the large and midcap stocks selected by the S&P Committee.

The SPY has got assets under management of $264 billion at the moment and its average daily trading volume is $50 billion. In other words, it is an extremely liquid ETF that invests in the biggest companies within the S&P 500, giving an opportunity for investors to get an exposure to the most well-known companies out there without having to pick individual stocks by themselves – a very suitable option especially for less experienced investors.

Technical Analysis

By looking at the daily chart on the SPY, one could easily see the huge correction that was caused during the coronavirus outbreak where the price dropped from the $340 highs on the 20th of February to reach the lows at $220 a month later. The main reason for the drop during the coronavirus was caused by investors’ fear for the very likely recession coming within the economy, which was only logical taking into account the fact that the business started slowing down and lots of people lost their jobs because of that.

As we have already mentioned above, such a massive correction had not happened since the financial crisis of 2008 and investors have started realizing the great opportunity of buying at these low levels and maximizing their profit potential on the way up.

Therefore, as we expected the price started reversing back to the upside immediately after reaching the $220 lows. Since then, we have seen a massive uptrend happening after the 20th of March where the SPY has already gone up towards the highs at $294 – a bullish rally of 34% that has already generated quite a lot of profits for those investors who managed to buy at the March lows.

Yet, the price struggled to break the resistance at $300 and investors started cashing in some profits, leading to a profit-taking correction towards the current levels at $282.

From a fundamental point of view, we must say that the GDP (Gross Domestic Product) from the US showed that the economy slowed down with 4.8% in the first quarter of 2020. Yet, this was widely expected by most analysts and investors. In other words, it was only logical that the coronavirus outbreak would have a negative impact on the economy and would lead to an economic slowdown in 2020. The Federal Reserve (FED) Chair Jerome Powell has already warned for a slowdown in the economy especially in the 2nd part of 2020.

Yet, the FED has been taking some very serious action in supporting the economy lately by cutting interest rates to 0% and announcing the new $2.3 trillion bond buying program where the Bank will be buying back bonds in order to inject money in the economy and avoid a more severe economic slowdown that might occur if no actions are undertaken.

That being said, together with the fact that the situation with the coronavirus has started to improve slowly around the globe and many pharmaceutical companies are working towards a vaccine and some other medicines that would cure the virus, we remain positive for buying stocks and ETFs at the great market discounts taking place at the moment.

Let’s go back to the SPY. By looking at the technical side of things, the price is close to testing the strong support line at $273-$274 where lots of buying pressure has been taking place in the past. In fact, the support at that point was created back in 2018 and the price has been finding lots of buying activity at that point for more than 2 years now. Furthermore, we can see that the price broke that level in the middle of April as it used to be a key resistance (now a support) and was then tested back on a profit-taking correction to the downside where investors started buying immediately as soon as the price hit the $273. In fact, that was a clear example of an uptrend continuation where investors showed the market that there is more room for a further growth on the price in the future.
Due to the huge bullish rally that has taken place lately after the sell-off in February, some the technical indicators had gone close to the overbought territory.

The Stochastics indicator reached the overbought area and started crossing down, giving some short-term indications for a potential profit-taking correction. In fact, that is only logical after the huge upside appreciation we have recently seen. As we have already mentioned, we remain bullish for the SPY at least for the short to middle term and believe the current price levels are still giving us amazing buying opportunities to benefit from and make high profits to the upside. As we stated above, the price is very close to testing the key support line at $273-$274 where lots of buying pressure is expected to take place. Furthermore, the 38.20% Fibonacci retracement level is staying right below that level, matching with the 50-day moving average and the middle Bollinger band, which stands exactly at that level as well, giving a further signal that it is very likely to see a bullish reversal from that key support mark.

Dow Theory 2.0: Correlation Confirmation

As you know, we at Dow Experts have developed a correlation confirmation model that gives us a chance to identify great market movements that give us a chance to maximize our followers’ investment profitability. So, before we take any action on the SPY we need to make sure our bullish expectations are confirmed by the other ETF we are analyzing – the XLY, and only if we get a confirmation from it then we would proceed with buying the SPY.

The Consumer Discretionary Select Sector SPDR Fund (XLY) is concentrated mostly on investing in the biggest companies within the consumer discretionary sector. The XLY delivers a cheap and very liquid exposure to the biggest names within the sector, excluding small and mid-cap companies.

In fact, the XLY invests in companies, such as Amazon, Home Depot, Mcdonald’s, Nike, Starbucks, General Motors and others.

The daily chart clearly shows the strong uptrend that has taken place from the 20th of March until the end of April. The price managed to find its ground at the $85 lows back then and investors started pushing the price higher, following the overall bullish market sentiment after the huge sell-off caused by the coronavirus’ fears before that. Similarly to the SPY, the XLY has managed to break a few resistance levels to the upside, such as the $92, followed by the $100-$105 and the $108. Yet, it failed to break the strong resistance at $118 and the main reason for that was because the price had gone up 39% already and it was only logical to expect lots of taking profit at that point among buyers who managed to enter the market and buy close to the $85 lows.

Therefore, the price has already gone down towards the $112. The daily chart clearly shows the key support level staying at $108 where lots of buying pressure has been taking place in the past and investors have been actively pushing the price higher from that major support line. The technical indicators are looking very similar to the SPY – the middle Bollinger band line is matching with the support level at that point, while the 50-day moving average is currently staying at $107 and giving further bullish indications at that level. Therefore, we believe the current short-term correction is giving us a great entry level for our buy positions that will give us a chance to maximize our profit potential to the upside.

Chart: XLY

We will start buying the XLY at the $109, just above the key support at $108 where lots of buying pressure is expected. Should the price break that strong support and drop further, we will be buying even more aggressively at the next major support level at $100-$102 in order to improve our average cost basis and be able to maximize our profit potential. Our first take profit target is staying at $117, followed by the longer-term target at $123-$124 where we will be fully cashing in our profits

The current behaviour and price action trade on the XLY clearly confirms our bullish stance on the SPY. Therefore, we believe buying the SPY around the current levels would give a chance to our followers to benefit from the great potential further bullish rally expected in the short to middle term and maximize their profitability.

Chart: SPY

We will start buying the SPY aggressively at the $275, just above the key support at $272 where lots of further buying activity is expected. In case the price manages to break that level and drops further, we will be interested in buying more at the next key support at $263, which will give us a chance to get a better average price, allowing us to further maximize our profitability to the upside. We will close some of our profits at the first target at $290, while our longer-term target stays at $305-$310 where we will be fully cashing our profits and wait for another correction that would give us a chance to benefit from further bullish movements on the ETF.

We at Dow Experts enjoy analyzing the market and helping our followers maximize their profitability by following our trading and investing ideas, which are always supported by our rational investment approach.

In order to further provide our followers with a strategy on how to fully capitalize on the above-described patterns and correlations, we analyzed the performance of some of the biggest companies within the SPY and XLY that have a big impact on the overall performance of the two ETFs.

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