S&P In Narrow Trading Range

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 Thursday December 31, 2020.

Stocks rose slightly on Wednesday amid renewed vaccine optimism while traders looked for clues on additional fiscal stimulus.  For the day, the Dow Jones Industrial Average gained 0.2 percent to 30,409.56. The S&P climbed 0.1 percent to 3,732.04, and the Nasdaq Composite advanced 0.2 percent to 12,870.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell more than 1 percent to 22.77.

Wednesday’s move higher came after a British regulator approved a coronavirus vaccine developed by the University of Oxford and AstraZeneca for emergency use. The approval followed the discovery of a new Covid strain in the U.K., which has also been confirmed in the U.S. AstraZeneca shares climbed 0.6 percent.  The Health Care Select Sector SPDR ETF (XLV) closed near the unchanged mark but is up more than 10 percent YTD, underperformed the S&P.  Now the question is what’s next?  Below is an update look at a trade in XLV.

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 – Health Care Select Sector SPDR ETF (weekly)

Our “U.S. Market Trading Map” painted XLV bars in green (buy) – see area ‘A’ in the chart.  After a strong run of outperformance in early November, XLV peaked in mid-November and coiled into a tight trading range as it worked off overbought conditions.  The overall technical backdrop remains positive, suggesting that XLV will break to new high as soon as it works off excessive optimism. Right now, the most important thing to watch is trading behavior near the 114 zone.  A close above that level on a weekly closing basis signifies a bullish breakout and trigger acceleration toward the 128 zone, or the 127.2% Fibonacci extension.

XLV has support near 108.  Short-term traders could use that level as the logical level to measure risk against.

Chart 1.2 – S&P 500 index (daily)

Short-term technical outlook remains 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”]

Not much has been changed since last update.  S&P continues basing sideways using the lower boundary of the pink band as support.  Money Flow measure trended higher from below the zero line.  The indicator is on a verge of turning positive, suggesting that selling pressure has eased.  Momentum indicator whipsaws near overbought zone, suggesting further backings and fillings likely.

For now, the 3745-3765 zone acted as strong resistance.  A close above it is required to neglect the short-term sideways trading pattern.  With that said, there is no reason to turn particularly bullish until this area is eclipsed.

The lower boundary of the pink band, around 3700, represents key support.  A failure to hold above that level will see a massive pick up in volatility.

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 3579.  Resistance is around 3765.  A sustain advance above that level has measured move to around 3830.

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, S&P is trapped within narrow trading range as traders await progress on stimulus.  Technical pressures are building up as the market dances its way into an increasingly tight trading range. S&P’s 3700 marks the inflection point.  A failure to hold above key level indicates a change in sentiment and a much deeper pullback should be expected.


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.