Market Internal Deteriorated As S&P Tests Key Support

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 Monday February 1, 2021.

We’ve noted in the previous Market Outlook that: “Thursday’s recovery rally is testing ‘support turned resistance’ near S&P’s 3800.  The short-term technical backdrop remains bearish.  The longer the index stays below that level, the more vulnerable it is to lower prices.”  As anticipated, stocks closing out the Friday session with the biggest weekly fall since October, as investors gauged the ramifications of Johnson & Johnson (JNJ)’s COVID-19 vaccine trial results, while a standoff between Wall Street hedge funds and small, retail investors added to volatility.

Johnson & Johnson fell 3.56 percent as one of the biggest weights on both the Dow and S&P after the drugmaker said its single-dose vaccine was 72% effective in preventing COVID-19 in the United States, with a lower rate of 66% observed globally.

For the day, the S&P lost 1.93 percent to 3,714.24. The Dow Jones Industrial Average fell 2.03 percent to 29,982.62 and the Nasdaq Composite dropped 2 percent to 13,070.70.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, jumped nearly 10 percent to 33.09.

Big tech also played a role in the day of selling on Wall Street as the Fab 5 sold off sharply.  Apple shares (AAPL) declined 3.74 percent while Microsoft (MSFT) fell 2.92 percent.  As such, Technology Select Sector SPDR Fund (XLK) tumbled 2.36 percent on the day and is down about 1 percent YTD, slightly outperformed the S&P.  Now the question is what’s next?  Below is an update look at a trade in XLK.

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 – Technology Select Sector SPDR Fund (weekly)

Our “U.S. Market Trading Map” painted XLK bars in red (sell) – see area ‘A’ in the chart.  XLK moved down to test support at the 127.2% Fibonacci extension after climbed above that level in December 2020.  That level roughly corresponds with the 2020 rising trend line. The overall technical backdrop deteriorated following recent selloff, suggesting that the support would not hold for long.  A close below 128 on a weekly closing basis will confirm the bearish reversal signal and a test of the more important support near the 123 zone should be expected.

XLK has resistance around 135.  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 27, 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”]

S&P moved down to test support at the trend channel moving average after falling below the lower boundary of the pink band on Wednesday.  That level was significant when the index climbed above it in November 2020.  Money Flow measure flashed a weak bearish signal as it’s on a verge of falling below the zero line, suggesting that the bears are more aggressive as prices dropped than the bulls were as prices ascended.

For now, the trend channel moving average, around 3715, is the line in the sand. We’d turn particular bearish if the index closes twice below that level.  Technically speaking, a failure to hold above key price level indicated that long-term buying pressure has been exhausted and a much deeper pullback should be expected and we’re looking at 3600.

Short-term trading range: 3700 to 3600.  S&P has support around 3715-3700.  A failure to hold above that level has measured move to around 3600.  Resistance is around 3790-3800.  A sustain advance above that level has measured move to 3870.

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, market internals deteriorated as S&P’s testing support at the trend channel moving average.  Technically speaking, the more often support is tested the weaker it becomes.  A failure to hold above key price level means that long-term buying pressure has finally been exhausted.  We’d turn particular bearish if the S&P closes twice below that level.


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.