S&P Shifted to Range Bound Trading Pattern

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Friday January 22, 2021.

We’ve noted in the previous Market Outlook that: “the fact that market is short-term overbought as S&P approaches key price level that had been successful in repelling price action in the past suggested that upside gains could be limited.  As for strategy, traders should consider buying into market dips rather than chasing breakouts.”  As anticipated, S&P closed near the flatline Thursday, gained less than 0.1 percent to 3,853.07, as strength in tech, led by a rally Intel (INTC) and Apple (AAPL), was offset by weakness in energy.  The Dow Jones Industrial Average dipped 0.04 percent to 31,176.01.  The Nasdaq Composite climbed 0.6 percent to 13,530.91 as Apple shares popped 3.7 percent.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell more than 1 percent to 21.32.

Homebuilders attracted strong buying support after data showed housing starts rose by the fastest pace since 2006.  As such, the SPDR S&P Homebuilders ETF (XHB) rose 0.70 percent on the day and is up nearly 10 percent YTD, outperformed the S&P.  Now the question is what’s next?  Below is an update look at a trade in XHB.

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 – SPDR S&P Homebuilders ETF (weekly)

Our “U.S. Market Trading Map” painted XHB bars in green (buy) – see area ‘A’ in the chart.  XHB has been on a tear in recent days after climbed above the closely watch 61 zone, or the 127.2% Fibonacci extension.  Thursday’s upside follow-through confirmed Wednesday’s bullish breakout signal.  The overall technical backdrop remains supportive of further advance.  So it seems to us that the January rally could carry XHB up to the 75 zone, or the 127.2% Fibonacci extension.  A close above 61 on a weekly closing basis will confirm this.

XHB has support near 61.  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 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”]

S&P printed a narrow range bar after recent rally ran out of steam near the lower boundary of the red band.  Money Flow measure trended higher from above the zero line indicating a positive net demand for stocks. Nonetheless, market is short-term overbought, following last week’s rally. This will give the bulls more pressure than they have already had.

For now, S&P has the lower boundary of the red band, currently at 3855, to trade against.  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.

On the downside, support is strong between 3820 and 3800.  Expect the index to draw in buyers in any pullback toward this zone.

Short-term trading range: 3800 to 3930.  S&P has support near 3820-3800.  Below it, a more significant support is around 3765.  Resistance is around 3855.  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, S&P shifted to range bound trading pattern as traders wonder whether more gain is warranted given the massive advance over the past months.  Near-term, expect further consolidations between 3855 and 3800.  Short-term traders could play the range. However, markets are volatile and traders may prefer not to hold large positions overnight.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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