S&P Cleared Key Resistance But Upside To Be Limited By Overbought Conditions

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Friday January 8, 2021.

We’ve noted in the previous Market Outlook that: “S&P broke out to new high Wednesday, signified resumption of the multi-month upswing.  Overbought conditions have returned on an intraday basis but momentum remains supportive so downside risk could be limited. It is possible that S&P could continue to drift higher as trading sentiment remains strong.  With this in mind, we’d look to reduce exposure into overbought strength, which might take the S&P closer to 3800 before a significant pullback unfolds.”  As anticipated, S&P closed at record highs Thursday, up 1.5 percent to 3,803.79, led by tech as calls on lawmakers to remove Donald Trump from office did little to cool bets on a stronger recovery on expectations that further fiscal stimulus is on the way after Democrats won control of the Senate.  The Dow Jones Industrial Average advanced 0.7 percent to 31,041.13.  The Nasdaq Composite popped 2.6 percent to 13,067.48.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell more than 10 percent to 22.37.

Tech led the record-setting day on Wall Street as big tech clawed back losses from a day earlier.  Apple (AAPL), Microsoft (MSFT), Amazon.com (AMZN), Facebook (FB) and Alphabet (GOOGL) traded higher.  As such, the Technology Select Sector SPDR Fund (XLK) 2.70 percent on the day but is slightly lower YTD, underperformed 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 basing sideways using the 127.2% Fibonacci extension as support after climbed above that level in December 2020.  The overall technical backdrop remains supportive of further advance.  So it seems to us that XLK will climb to new high as soon as it works off excessive optimism.   A close above 131 on a weekly closing basis will confirm this and trigger acceleration toward the 160zone, or the 161.8% Fibonacci extension.

XLK has support near 125.  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 January 6, 2021 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”]

Key technical development in Tuesday trading session was a close above the important sentiment 3800 mark.  The bullish breakout would be confirmed on another close above 3800 this week, which would support upside follow-through and a test of resistance at the lower boundary of the red band, currently at 3870.  As mentioned, the normal behavior for the S&P has been to consolidate and retreated almost every time it traded above that level so there is a high probability that a significant consolidation pattern will again develop in this area.  Additionally, overbought conditions have returned on an intraday basis so it should not be surprising to see some backings and fillings in the coming days.

For now, 3700 is the line in the sand.  This level was tested several times over the past weeks.  This history indicated an important role in terms of support.  We’d turn particular bearish if the index closes twice below the 3700.

Short-term trading range: 3750 to 3870.  S&P has support near 3750.  Below it, a more significant support lies at the important sentiment 3700 mark.  Resistance is around 3870.  A sustain advance above that level has measured move to around 4000.

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 cleared key resistance, breaking out above the important sentiment 3800 mark.  Consecutive close above 3800 this week would confirm Thursday’s bullish signal, supporting upside follow-through in the days ahead.  However, market is short-term overbought following recent advance. There could be a sell-off in the offing but it would be shallow if so.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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