S&P Could Continue To Drift Higher As Trading Sentiment Remains Strong

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Monday February 8, 2021.

We’ve noted in the previous Market Outlook that: “S&P moved up to test resistance at the lower boundary of the red band after recent pullback found support near the trend channel moving average.  Overbought conditions have returned on an intraday basis but momentum remains supportive so downside risk could be limited. It is possible that S&P could continue to drift higher as trading sentiment remains strong.  With this in mind, we’d look to reduce exposure into overbought strength, which might take the S&P closer to 3900 before a significant pullback unfolds.”    As anticipated, S&P notched a second straight day of all-time highs Friday, up 0.4 percent to 3,886.83, as President Joe Biden signaled that he was prepared to pass the stimulus bill without Republican support, stoking investor optimism that in the absence of compromises needed to win over GOP support the final package could be closer to $1.9 trillion.  The Dow Jones Industrial Average rose 0.3 percent to 31,148.24.  The Nasdaq Composite advanced 0.6 percent to 13,856.30.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell more than 4 percent to 20.87.

Mostly bullish quarterly earnings continued to surprise to the upside, further boosting investor sentiment.  Snap (SNAP) was up 9 percent, shrugging off a softer-than-expected first-quarter guidance as earnings topped analysts’ estimates.  As such, the Global X Social Media ETF (SOCL) rose 2.49 percent on the day and is up more than 17 percent YTD, outperformed the S&P.  Now the question is what’s next?  Below is an update look at a trade in SOCL.

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 – Global X Social Media ETF (weekly)

Our “U.S. Market Trading Map” painted SOCL bars in green (buy) – see area ‘A’ in the chart.  SOCL has been on a tear in recent months after climbed above the 2018 high in late May 2020.  This is a positive development, signified a bullish breakout and upside reversal.  The overall technical backdrop remains supportive of further advance.  So it seems to us that the epic 2020 rally could carry SOCL above the 80 zone, or the 261.8% Fibonacci extension before a significant pullback unfolds.

SOCL has support just below 64.  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 continues drifting higher near the lower boundary of the red band, or extreme overbought zone, after recent pullback found support near the trend channel moving average. Money Flow measure climbed to multi-month high, indicating a positive net demand for stocks. Momentum indicator trended higher but the indicator is much closer to overbought than oversold zone. This could put a lid on the upside.

Right now the most important thing to watch is trading behavior as the lower boundary of the red band, just below the important sentiment 3900 mark, is tested as resistance.  The normal behavior for the S&P has been to consolidate and retreated almost every time it traded above that level so there is a high probability that a significant consolidation pattern will again develop in this area.

Short-term trading range: 3840 to 3900.  S&P has support around 3840.  A failure to hold above that level has measured move to around 3800.  Resistance is around 3900.  A sustain advance above that level has measured move to 3960.

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, overbought conditions have returned on an intraday basis but momentum remains supportive so downside risk could be limited. It is possible that S&P could continue to drift higher as trading sentiment remains strong.  As for strategy, buying into short-term dips remains the most profitable strategy.

 

Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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