Market Internal Deteriorated As S&P Tests Key Support

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 January 5, 2021.

We’ve noted in the previous Market Outlook that: “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.”  As anticipated, S&P hit record highs at the open before turning lower Monday as a close race in the Georgia Senate runoff elections raised concerns over the prospect of a Democrat-controlled Congress that would likely usher in higher taxes at a time when the new strain of Covid-19 continues to spread.

Republican Senators David Perdue and Kelly Loeffler are facing stiff competition in the Georgian runoff elections from Democrats Jon Ossoff and Raphael Warnock. The race has become too close to call, prompting investors to weigh the prospect of higher taxes and increased government spending under a Democrat-controlled Congress.

The political uncertainty comes as the new coronavirus variant, initially identified in the UK, continues to spread in the U.S., raising concerns that further lockdown measures will be needed to curb the contagion. New York Governor Andrew Cuomo confirmed the state’s first case of new Covid strain.

For the day, the bench mark gauge dipped 1.5 percent to 3,700.65. The Nasdaq Composite also slid 1.5 percent to 12,698.45.  The Dow Jones Industrial Average fell 1.3 percent to 30,223.89.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, surged more than 18 percent to 26.97.

Real estate and industrials sectors were among the biggest decliners, with the latter paced by declines in airline stocks on worries further coronavirus restrictions will hurt travel demand. United Airlines Holdings (UAL), Delta Air Lines Inc. (DAL) and American Airlines (AAL) all closed lower. Aircraft maker Boeing (BA) also contributed to the selloff after closing 5 percent lower following a downgrade from Bernstein.  As such, the Industrial Select Sector SPDR Fund (XLI) fell 2.42 percent on the day, underperformed the S&P.  Now the question is what’s next?  Below is an update look at a trade in XLI.

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 – Industrial Select Sector SPDR Fund (weekly)

Our “U.S. Market Trading Map” painted XLI bars in red (sell) – see area ‘A’ in the chart.  The first dominant feature on the chart is the rising trend line starting in late March 2020.  The second dominant feature of the chart is the sideways trading pattern between 86 and 100 since late November 2020, which represents the digestion period. This week’s selloff pushed the ETF below the November rising trend line, signifies a bearish breakout and downside reversal.  This is a negative development, suggesting that XLI might have to move to a much lower level to attract new buyers and we’re looking at the 2020 rising trend line, around 83.  A close below 87 on a weekly closing basis will confirm this.

XLI has resistance near 100.  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 shifted to bearish (sell).  Last changed January 4, 2021 from bullish (buy) – (see area ‘A’ in the chart).

[Note: for more details analysis, please take a look at our “US Market ETF Trading Map”]

Key technical development in Monday trading session was a close below the lower boundary of the pink band, the level that offered support since the index broke out in early November.  This is a negative development, signified a bearish breakout and downside reversal.  Momentum indicator shifted lower from near overbought zone, suggesting further short-term weakness likely.  Money Flow measure trended lower from below the zero line, indicating a negative net demand for stocks.  These elements suggested that the path with least resistance is to the downside.

However, let’s notice that the late day rebound pushed the index above the important sentiment 3700 zone.  That level was significant when the index climbed above it in December.  We’d turn particular bearish if the index closes twice below the 3700.

Short-term trading range: 3590 to 3780.  S&P has support near 3700.  Below it, a more significant support lies at the trend channel moving average, currently at 3590.  Resistance is around 3730.  A sustain advance above that level has measured move to around 3780.

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, market internal deteriorated as S&P moved down to test support at the important sentiment 3700 zone.  That level is significant in charting terms.  A failure to hold above it means that long-term buying pressure has finally been exhausted.  On balance, we remain near-term negative for S&P as we believe market vulnerable to some downside retracement over the short-to-intermediate term.

 

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.