S&P Held Support But Follow-through Is The Key

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Wednesday January 20, 2021.

Stocks closed higher Tuesday, led by gains in energy and technology and growing optimism that more stimulus is about to hit bank accounts under President-elect Joe Biden’s administration.  The Dow Jones Industrial Average rose 0.4 percent to 30,930.52. The S&P gained 0.8 percent to 3,798.91. The tech-heavy Nasdaq Composite outperformed jumped 1.5 percent to 13,197.18.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell more than 4 percent to 23.24.

Energy attracted strong buying support amid rising oil prices on optimism further stimulus from the incoming Biden administration will boost demand.  As such, the Energy Select Sector SPDR Fund (XLE) rose 2.01 percent on the day and is up more than 15 percent YTD, outperformed the S&P.  Now the question is what’s next?  Below is an update look at a trade in XLE.

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 – Energy Select Sector SPDR Fund (weekly)

Our “U.S. Market Trading Map” painted XLE bars in green (buy) – see area ‘A’ in the chart.  XLE has been on a tear in recent days after the mid-December pullback found support near the 1-year moving average.  The early January rally pushed the ETF up against the closely watch 45 zone, or the 38.2% Fibonacci retracement and the June recovery high.  The overall technical backdrop remains supportive of further advance.  So it seems to us that the January rally could carry XLE above 45 and up to the 50 zone, or the 50% Fibonacci retracement.

XLE has support near 40.  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 bullish (buy).  Last changed January 19, 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”]

Once again, the S&P rebounded nicely off support at the lower boundary of the pink band, a key technical level.  Money Flow measure trended higher from above the zero line, indicating a positive net demand for stocks.  This is a bullish development but let’s notice that despite recent selloff, market is much closer to overbought than oversold zone so it should not be surprise to see further consolidation as overbought conditions are absorbed.

Short-term trading range: 3750 to 3840.  S&P has support near 3750.  Below it, a more significant support is around 3674.  Resistance is around 3840.  A sustain advance above that level has measured move to around 3920.

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, S&P tested and held support at the lower boundary of the pink band.  While Tuesday’s rally had improved the posture of our short-term indicators, which supportive of further upside probing, follow-through is the key.  S&P has 3840 to trade against.  If that were to break, we could see 3900 next.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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