S&P In Rally And Retreat Trading Environment

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Monday January 4, 2021.

U.S. stocks ended a tumultuous year with the Dow and S&P at records, as the three major U.S. equity indexes notched solid-to-spectacular yearly gains despite an economy upended by the COVID-19 virus as investors looked to a post-pandemic world.  For the day, Dow Jones Industrial Average added 0.7 percent to 30,606.48. The S&P climbed 0.6 percent to 3,756.07, while the Nasdaq Composite advanced 0.1 percent to 12,888.28.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell less than 1 percent to 22.75.

For the year, the S&P gained 16.3 percent, the Dow Jones Industrial Average rose 7.2 percent and the Nasdaq Composite advanced 43.6 percent, which marked the biggest yearly gain for the tech-heavy index since 2009.

Tech was by far the dominant sector in 2020, surging more than 42 percent for the year, as the pandemic forced more people to work from home. This shift drove up demand for cloud services and computer equipment.  As such, the Technology Select Sector SPDR Fund (XLK) rose 0.15 percent on the day and is up about 42 percent YTD, outperformed the S&P.  Now the question is what’s next?  Below is an update look at a trade in XLK.

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 – Technology Select Sector SPDR Fund (weekly)

Our “U.S. Market Trading Map” painted XLK bars in green (buy) – see area ‘A’ in the chart.  XLK has been on a tear in recent days after the mid-October pullback found support near the 2020 rising trend line.  Last week’s upside follow-through confirmed the prior week’s bullish breakout above the closely watch 128 zone, or the 127.2% Fibonacci extension. This is a positive development, opened up for a rapid advance toward the 160 zone, or the 161.8% Fibonacci extension.

XLK has support near 124.  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”]

Once again, S&P rebounded nicely after the early selloff attempt found support near the lower boundary of the pink band.  That level is significant in charting terms. It provided support and acted as launching pad throughout the November-December upswing.  This is bullish but let’s notices that the market is short-term overbought following recent advance.  Additionally, while Money Flow measure trended higher, the indicator is still below the zero line, indicating a weak demand for stocks.  This could put a cap on the rally.

For the near term, the market has carved out key short-term resistance and support levels for traders to monitor.  Major resistance lies at 3780.  A sustain break above that level is required before there is any real prospect of a change in the short-term range bound trading pattern.

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 3780.  S&P has support near 3700.  Below it, a more significant support lies at the trend channel moving average, currently at 3585.  Resistance is around 3780.  A sustain advance above that level has measured move to around 3850.

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 drifts higher 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)

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