S&P In Sideways Trend That Reflects An Indecisive Market

Editor’s note: this column was originally published on Capital Essence’s CEM News. It’s being republished as a bonus for the loyal readers. For more information about subscribing to CEM News, please click here.


Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Wednesday January 27, 2021.

Stocks closed just below the flatline Tuesday as investors paused their bullish bets on stocks amid a swath of quarterly reports and an update on monetary policy due Wednesday as the Federal Reserve kicked off its two-day meeting.  For the day, the broad equity benchmark dipped 0.2 percent to 3,849.57. The Dow Jones Industrial Average dipped 0.1 percent to 30,937.10. The Nasdaq Composite fell 0.1 percent to 13,626.06.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell less than 1 percent to 23.02.

Industrials were under selling pressure despite General Electric’s upbeat earnings, the industrial conglomerate reported better-than-expected free cash flow.  The Industrial Select Sector SPDR Fund (XLI) fell 0.92 percent on the day and is down more than1 percent YTD, underperformed the S&P.  Now the question is what’s next?  Below is an update look at a trade in XLI.

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 – Industrial Select Sector SPDR Fund (weekly)

Our “U.S. Market Trading Map” painted XLI bars in red (sell) – see area ‘A’ in the chart.  The first dominant feature on the chart is the rising trend starting in late March 2020.  The second dominant feature of the chart is the sideways trading range between the 86 and 91 since late November, which represents the digestion period.  Technically speaking, the fact that XLI managed to hold on to most of the March-November gains despite overbought conditions, indicating an internal strength.  Over the next few weeks, traders should monitor the retreat and rebound behaviors as the 85 zone, or the 2020 rising trend line, is tested as support.  If XLI could hold above that level then a breakout above 91 would be easier to achieve.  A close above 91 on a weekly closing basis signifies a bullish breakout and trigger acceleration toward the 104 zone, or the 127.2% Fibonacci extension.

XLI has support near 85.  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, S&P retreated after the early rally attempt ran out of steam near 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.

The overall technical backdrop remains supportive of further advance so pullback should be shallow and quick.  With this in mind, we’d look to buy into short-term market dips.

For now, the lower boundary of the pink band, around 3800, represents key support.  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, S&P remains in a short-term consolidation phase, which represents a digestion period in the aftermath of the January’s impressive rally.  Resistance is strong near the lower boundary of the red band and upside momentum does not appear strong enough to generate a decisive breakout.  While near-term risk is greater to the upside, markets are volatile and traders may prefer not to hold large positions overnight.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

© All rights reserved and actively enforced.
Note: This is a free edition of The Market Outlook, a daily CEM News subscriber newsletter. To get this column before market opens together with hundreds of technical trading ideas (including stocks and ETFs) every month, please click here.
Subscribe to CEM News to receive more in-depth research from Capital Essence.