S&P In Narrow Trading Range

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Wednesday March 31, 2021.

We’ve noted in the previous Market Outlook that: “while overbought condition is likely keeping buyers at bay, the overall technical backdrop remains supportive of further advance.  As for strategy, pullback will present a buying opportunity, while selling into strength may not be the best strategy in a market considered likely to bounce back.”  As anticipated, the S&P huffed and puffed Tuesday, but ultimately struggled to cut its losses as megacap tech couldn’t find a way to return to the top of the list of fashionable investing despite a slip in U.S. bond yields.  For the day, the bench mark gauge lost 0.31 percent to 3,958.88.  The Dow Jones Industrial Average fell 0.3 percent to 33,071.07 and the Nasdaq Composite dropped 0.11 percent to 13,045.39.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, tumbled more than 5 percent to 19.61.

U.S. consumer remains in good health as consumer confidence rose more than expected to its highest level since highest reading since July 2019.  As such, the Consumer Discretionary Select Sector SPDR Fund (XLY) rose 0.98 percent on the day and is up about 4 YTD, slightly underperformed the S&P.  Now the question is what’s next?  Below is an update look at a trade in XLY.

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 – Consumer Discretionary Select Sector SPDR Fund (weekly)

Our “U.S. Market Trading Map” painted XLY bars in green (buy) – see area ‘A’ in the chart.  Over the past few weeks, has been basing sideways using the 2020 rising trend line as support after breaking above the February falling trend line in early March.  The overall technical backdrop remains positive, suggesting that XLY will take a new leg higher as soon as it works off excessive optimism.  Right now, the most important thing to watch is trading behaviors as the February high, just above 173, is tested as resistance.  A close above that level signifies a bullish breakout and trigger acceleration toward the 161.8% Fibonacci extension, just above the 200 zone.

XLY has support near 163.  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 March 26, 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”]

Not much has been changed since last update.  S&P continues basing sideways using the lower boundary of the pink band as support.  Money Flow measure flattened near zero line, indicating a lack of commitment among the bulls. Momentum indicator whipsaws below overbought zone, suggesting further backings and fillings likely.  For now, 3900 is the line in the sand.  We’d turn particular bearish if the index closes twice below that level.

On the upside, resistance is strong near the 4000 zone.  That level roughly corresponds with 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 January, February and mid-March, so there is a high probability that a significant consolidation pattern will again develop in the coming days.  Nonetheless, the overall technical backdrop continues favor the bulls so we believe that any dips are a buying opportunities rather than time to take profits and get out.

Short-term trading range: 3900 to 3950.  S&P has support around 3950.  A failure to hold above that level has measured move to around 3900.  Resistance is around 4000.  A sustain advance above that level has measured move to 4100.

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, technical pressures are building up as the market dances its way into an increasingly tight trading range. S&P’s 3900 marks the inflection point.  A failure to hold above key level indicates a change in sentiment and a much deeper pullback should be expected.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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