S&P Turned Indecisive Near Key Price Level

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 Thursday February 4, 2021.

We’ve noted in the previous Market Outlook that: “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.”  As anticipated, S&P rose slightly on Wednesday, rising for a third straight day as investors digested a wave of corporate earnings. For the day, the broad equity benchmark rose 0.1 percent to 3,830.17.  The Dow Jones Industrial Average gained 0.1 percent to 30,723.60. The tech-heavy Nasdaq Composite dipped less than 0.1 percent to 13,610.54 amid a drop in Amazon shares.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, tumbled more than 10 percent to 22.91.

Technology lost steam into the close Wednesday even as big tech delivered better-than-expected earnings.  Alphabet (GOOGL) rose 7 percent to record highs as strong ad-revenue growth in its YouTube and Search businesses bolstered performance.  Amazon.com (AMZN) fell 2 percent despite topping Wall Street estimates amid news that Chief Executive Jeff Bezos was set to step down and take up the role of chairman.  As such, the Technology Select Sector SPDR Fund (XLK) fell 0.34 percent on the day but is up about 3 percent YTD, 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 green (buy) – see area ‘A’ in the chart.  Over the past few weeks, XLK has been basing sideways using the 127.2% Fibonacci extension as support after climbed above that level in mid-December.  This week’s bullish reversal suggested that XLK will climb to new high as soon as it works off excessive optimism.  Right now the most important thing to watch is trading behaviors as the 135 zone is tested as resistance.  A close above that level on a weekly closing basis signifies a bullish breakout and trigger acceleration toward the 160 zone, or the early 161.8% Fibonacci extension.

XLK has support around 129.  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 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”]

S&P printed a narrow range bar near last week’s bearish breakdown point.  In accordance to the Japanese candlestick pattern recognition, Wednesday narrow range bar indicates uncertainty – traders refuse to press hard one way or the other just because they are not very sure about the near-term direction.  This explains why market often uses neutral bar to change direction.  Momentum indicator is fast approaching level that has been successful in repelling prices in the past months.  Nonetheless, market internal remains supportive of further advance.  This could help putting a short-term floor under the market.

Over the next few days, traders should monitor the rally and retreat behaviors as the lower boundary of the pink band, around 3800.  Expect the S&P to draw in buyers in any pullback to that level.

Short-term trading range: 3800 to 3880.  S&P has support around 3800.  A failure to hold above that level has measured move to around 3700.  Resistance is around 3880.  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, the fact that the S&P turned indecisive as it approaching key technical level does not favor a sustain break to the upside.  The overbought condition will give the bulls more pressure than they have already had.  Over the next few days, traders should look for trading behavior as 3800 is tested as support.  If the bulls can hold above that level, then market will regroup and move higher.


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.