S&P Resumed Multi-month Upward Trend

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Wednesday February 3, 2021.

Stocks rallied on Tuesday, as signs of easing Covid-19 pandemic prompted bullish bets on cyclical stocks like financials in the wake of the fading momentum in the short-squeeze trade.  The Dow Jones Industrial Average climbed 1.6 percent to 30,687.48. The S&P gained 1.4 percent to 3,826.31.  The tech-heavy Nasdaq Composite popped 1.6 percent to 13,612.78.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, tumbled more than 15 percent to 25.56.

Financials, mostly banks, led the move higher, underpinned by rising U.S. government bond yields as the Covid-19 vaccine roll out continued and infection rates slowed.  Bank of America (BAC) and JPMorgan Chase (JPM) jumped more than 3 percent, while Goldman Sachs Group (GS) closed up 4 percent. Rising U.S. government bond yields tend to boost the net interest income that banks earn on their loan products.  As such, the SPDR S&P Bank ETF (KBE) jumped 2.14 percent on the day and is up more than 6 percent YTD, outperformed the S&P.  Now the question is what’s next?  Below is an update look at a trade in KBE.

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 Bank ETF (weekly)

Our “U.S. Market Trading Map” painted KBE bars in green (buy) – see area ‘A’ in the chart.  Over the past few weeks, KBE has been trending lower in a short-term corrective mode after the October rally ran out of steam near the late 2019 high.  The correction tested support at the 43 zone, the late 2020 rising trend line and the 4-year moving average. This week’s bullish reversal suggested that the support would hold and a retest of the 48 zone should be expected. That level is significant in charting terms.  A close above that level on a weekly closing basis signifies a bullish breakout and trigger acceleration toward the 52 zone, or the early 2018 high.

KBE has support around 43.  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 February 2, 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 climbed above the lower boundary of the pink band after recent pullback found support near the trend channel moving average. Momentum indicator shifted higher from near above the oversold zone, allowing additional upside probing. This is a positive development, increased the probability for a retest of the lower boundary of the red band, currently at 3875. Perhaps the positive Money Flow measure is the best illustration of the bull’s case.

Over the next few days, traders should monitor the rally and retreat behaviors as the lower boundary of the pink band, around 3800, is tested as support.  Consecutive close above that level will confirm the bullish signal and trigger acceleration toward the 3875 zone.

Short-term trading range: 3800 to 3875.  S&P has support around 3800.  A failure to hold above that level has measured move to around 3700.  Resistance is around 3875.  A sustain advance above that level has measured move to 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 climbed above the lower boundary of the pink band Tuesday, signify resumption of the multi-month upward trend.  Nevertheless, it will be important to monitor the rally and retreat behaviors over the next few days to determine whether breakouts are decisive.

 

Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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