Buy The Dips Remains The Most Profitable Strategy

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Tuesday January 26, 2021.

We’ve noted in the previous Market Outlook that: “there’s an orderly high-level consolidation period near the lower boundary of the red band.  The overall technical backdrop remains supportive of further advance, suggesting that S&P will breakout to new high as soon as it works off excessive optimism.”  As anticipated, S&P rose slightly to a record on Monday, up 0.4 percent to 3,855.36, as investors prepared for a busy week of earnings featuring reports from the largest tech companies.  Microsoft reports earnings on Tuesday after the closing bell, while Apple, Facebook and Tesla are set to report earnings on Wednesday.  The tech-heavy Nasdaq Composite gained 0.7 percent to 13,635.99. The Dow Jones Industrial Average dipped 0.1 percent to 30,960.00.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, rose nearly 6 percent to 23.19.

The renewed strength in tech comes as investor appetite for cyclicals run of steam somewhat amid concerns over prolonged path for further stimulus and the threat of further Covid-19 restrictions.  Energy was the biggest cyclical sector in the red, weighed down by weaker oil prices amid ongoing worries over pandemic-fueled weakness in crude.  National Oilwell Varco (NOV), Devon Energy (DVN) and TechnipFMC (FTI) were down sharply, with the latter down about 5 percent.  As such, the Energy Select Sector SPDR Fund (XLE) dropped 1.02 percent on the day but is up about 10 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 moved down to test support at the late 2020 rising trend line after recent rally ran out of steam near the 38.2% Fibonacci retracement.  The overall technical backdrop remains positive, suggesting that XLE will move higher as soon as it works off excessive optimism.  Support is around 40. If it could hold above that level then a breakout above 45 would be easier to achieve.  A close above 45 on a weekly closing basis has measure move to around 51, 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 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”]

Once again, the S&P rebounded nicely after the early selloff attempt found support near the important sentiment 3800 mark.  This is a positive development but let’s notice that with Monday’s gains, the index is up against the lower boundary of the red band.  As mentioned, the normal behavior for the S&P has been to consolidate and retreated almost every time it traded above that level, the way we had in October and November 2020, so there is a high probability that a significant consolidation pattern will again develop in the coming days.

On the downside, support is strong near the lower boundary of the pink band, around 3800.  Expect the index to draw in buyers in any pullback toward this zone.

Short-term trading range: 3800 to 3870.  S&P has support near 3800.  Below it, a more significant support is around 3700.  Resistance is around 3870.  A sustain advance above that level has measured move to around 3950.

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, while overbought condition is likely keeping buyers at bay, the overall technical backdrop remains supportive of further advance.  As for strategy, pullback will present a buying opportunity, while selling into strength may not be the best strategy in a market considered likely to bounce back.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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