S&P In Bullish Digestion Period

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Thursday March 4, 2021.

We’ve noted in the previous Market Outlook that: “S&P is at key technical juncture.  Current rally is testing formidable resistance near 3900.  The longer the index stays below that level, the more vulnerable it is to lower prices.”  As anticipated, S&P closed lower Wednesday as resurgent worries about rising U.S. bond yields hit equity market as investors waited to see if Federal Reserve Chair Jerome Powell will address concerns about the risk of a rapid rise in long-term borrowing costs.  For the day, the S&P fell 1.3 percent to 3,819.72. The Nasdaq Composite slid 2.7 percent to 12,997.75.  The Dow Jones Industrial Average gave up 0.4 percent to 31,270.09.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, jumped more than 10 percent to 26.67.

President Joe Biden said late Tuesday that the U.S. will have a large enough supply of coronavirus vaccines to inoculate every adult in the nation by the end of May. That would be two months ahead of schedule. The vaccine rollout is seen as key part in getting Americans back to work and for the economy to recover.  Growing optimism over the vaccine rollout sparked a rally in cyclical stocks and reopening plays. American Airlines, Carnival and Norwegian Cruise Line jumped 3 to 6 percents respectively. As such, the Energy Select Sector SPDR ETF (XLE) rose 1.47 percent on the day and is up more than 30 percent YTD, outperformed the S&P.  Now the question is what’s next?  Below is an update look at a trade in XLE.

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 – Energy Select Sector SPDR ETF (weekly)

Our “U.S. Market Trading Map” painted XLE bars in green (buy) – see area ‘A’ in the chart. XLE has been on a tear in recent days after the early February rally pushed the ETF above the summer 2020 recovery high. This week’s rally pushed the ETF up against the 50% Fibonacci retracement of the 2018 downswing, just above 51.  That level is significant in charting terms.  A close above it on a weekly closing basis signifies a bullish breakout and trigger acceleration toward the 61.8% Fibonacci retracement, around 58.

XLE has support just above 46.  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 bearish (sell).  Last changed March 3, 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”]

Once again, the S&P moved down to test support at the trend channel moving average after Monday’s recovery rally ran into resistance near the 3900 zone.  Momentum indicator shifted lower from near oversold zone, suggesting further short-term weakness likely.  Perhaps the negative Money Flow measure is the best illustration of the bears’ case.

For now, the trend channel moving average, just above the important sentiment 3800 mark, represents key support.  If it closes below that level, the next leg is likely lower, and we’re looking at 3700.

Short-term trading range: 3800 to 3970.  S&P has support around 3800.  A failure to hold above that level has measured move to around 3680.  Resistance is around 3900.  A sustain advance above that level has measured move to 3970.

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 big picture remains the same. There is a consolidation near the trend channel moving average, which represents a digestion period in the aftermath of the late 2020 epic rally.  While more backing and filling would not be a surprise, if the S&P could hold above 3800 then a move above 3900 would be easier to be sustained.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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