S&P In Rally And Retreat Trading Environment

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 Tuesday December 29, 2020.

Stocks closed higher Monday after Donald Trump signed off on the $900 billion stimulus bill, averting a government shutdown and giving the economic recovery a much-needed boost. The stimulus package is expected to cushion the hit to the economic recovery from restrictions across the country amid efforts to contain the spread of the virus.  As well as stimulus efforts, progress on further Covid-19 vaccines boosted sentiment on risk assets.  AstraZeneca (AZN)’s vaccine is expected to get the regulatory nod from UK health authorities later this week, while Novavax’s (NVAX) vaccine candidate got late-stage clinical trials underway in the U.S. and Mexico.

For the day, the Dow Jones Industrial Average added 0.7 percent to 30,403.97. The S&P climbed 0.9 percent to 3,735.36, and the Nasdaq Composite rose 0.7 percent to 12,899.42.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, rose about 1 percent to 21.70.

Consumer discretionary sector were boosted by the positive stimulus and vaccine news, with airlines, cruise lines, and casino stocks higher.  As such, the Consumer Discretionary Select Sector SPDR ETF (XLY) rose 1.14 percent on the day and is up more than 27 percent YTD, outperformed the S&P.  Now the question is what’s next?  Below is an update look at a trade in XLY.

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 – Consumer Discretionary Select Sector SPDR ETF (weekly)

Our “U.S. Market Trading Map” painted XLY bars in green (buy) – see area ‘A’ in the chart. Over the past few weeks, XLY has been basing sideways after the early November rally ran out of steam near 160, just below the 127.2% Fibonacci extension.  The overall technical backdrop remains positive, suggesting that XLY will breakout to new high as soon as it works off excessive optimism.

Over the next few weeks, traders should monitor trading behavior as the 160-165 zone is tested as resistance.  A close above 165 on a weekly closing basis has measured move to around 200, or the 161.8% Fibonacci extension.

The 2020 rising trend line, around 152, represents the logical level to measure risk against.  All bets are off should XLY close below that level.

Chart 1.2 – S&P 500 index (daily)

Short-term technical outlook shifted to bullish (buy).  Last changed December 28, 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, the S&P rebounded nicely after recent pullback found support near the lower boundary of the pink band.  This level is significant in charting terms.  It provided support and acted as launching pad for the November-December upswing.  This is a positive development but let’s notice the return of overbought conditions on an intraday basis.  Additionally, while Money Flow measure trended higher, the indicator still holds below the zero line, indicating a weak demand for stocks.  This could put a cap on the rally.

For now, the lower boundary of the pink band, around 3700, is the line in the sand.  A failure to hold above it indicated that long-term buying pressure has been exhausted and a much deeper pullback should be expected and we’re looking at 3568, based on the trend channel moving average.

Short-term trading range: 3700 to 3765.  S&P has support near 3700.  Below it, a more significant support lies at the trend channel moving average, currently at 3568.  Resistance is around 3765.  A sustain advance above that level has measured move to around 3800.

Long-term trading range: 3200 to 3800.  S&P has support near 3200.  A failure to hold above that level has measured move to 2900.  The index has resistance near 3800.  A close above that level has measured move to 4100.

In summary, the fact that Money Flow measure remains negative as the S&P breakout to new high does not favor a sustain break to the upside.  Our near-term works on price structure and momentum suggested strongly that the S&P remains in for a ‘range-bound’ trading environment.  This is a rally and retreat environment. It is not a trending environment. Short-term traders can anticipate continued volatility with rapid up and down moves in the markets.


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.