Near-term Technical Outlook Remains Bearish As S&P Tests Key Support

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Tuesday January 19, 2021.

Stocks closed lower Friday, paced by a decline in financials as Wall Street banks delivered mixed quarterly results, while the signs of a slowdown in the recovery prompted traders to keep their powder dry.  The Dow Jones Industrial Average fell 0.6 percent to 30,814.26. The S&P dipped 0.7 percent to 3,768.25, and the Nasdaq Composite slid 0.9 percent to 12,998.50.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, rose nearly 5 percent to 24.34.

Financials were among the biggest decliners, led by a drop in banking stocks after JPMorgan, Citigroup (C) and Wells Fargo (WFC) reported mixed quarterly results.  As such, the Financial Select Sector SPDR Fund (XLF) fell 1.65 percent on the day but is up 5 percent YTD, outperformed the S&P.  Now the question is what’s next?  Below is an update look at a trade in XLF.

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 – Financial Select Sector SPDR Fund (weekly)

Our “U.S. Market Trading Map” painted XLF bars in green (buy) – see area ‘A’ in the chart.  XLF has been on a tear in recent days after breaking out above the 4-year moving average in November 2020.  Last week’s rally tested resistance at the early 2020 high.  Friday’s bearish trading action suggested that the resistance would hold, at least for the time being.  The overall technical backdrop remains supportive of further advance.  XLF has support just below 29.  If it could hold above that level then a push above the 2020 high, just above 31, would be easier to achieve. With that said a close above 31.30 on a weekly closing basis signifies a bullish breakout and will trigger acceleration toward the 38 zone, or the 127.2% Fibonacci extension.

XLF has support near 29.  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 bearish (sell).  Last changed January 14, 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”]

As anticipated, S&P moved down to test support at the lower boundary of the pink band after recent rally attempt ran out of steam near the lower boundary of the red band.  Momentum indicator trended lower from near the overbought zone, suggesting further short-term weakness likely.

Money Flow measure is above the zero line, indicating a positive net demand for stocks.  This could put a short-term floor under the market.   With that said while more backing and filling would not be a surprise, if the S&P could hold above the lower boundary of the pink band, currently at 3747, then a retest of the lower boundary of the red band, currently at 3840, high would be easier to be achieved.

Short-term trading range: 3747 to 3850.  S&P has support near 3747.  Below it, a more significant support is around 3667.  Resistance is around 3850.  A sustain advance above that level has measured move to around 3940.

Long-term trading range: 3300 to 4300.  S&P has support near 3600.  A failure to hold above that level has measured move to 3300.  The index has resistance near 4000.  A close above that level has measured move to 4300.

In summary, near-term technical outlook remains bearish as S&P moved down to test support at the lower boundary of the pink band.  This level is significant in charting terms.  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 3667, based on the trend channel moving average.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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