S&P Spinning Top Pattern Signals Impending Trend Reversal

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Thursday March 11, 2021.

We’ve noted in the previous Market Outlook that: “our near-term works on momentum and price pattern suggested strongly that the path with least resistance remains higher as long as the S&P holds above 3800.  As for strategy, buying into short-term market dips remains the most profitable strategy.”  As anticipated, S&P closed higher Wednesday, added 0.6 percent to 3,898.81, after falling bond yields and a new stimulus package spurred investors to snap up stocks that will benefit from a faster recovery from the pandemic. The Dow Jones Industrial Average rose 1.5 percent to 32,297.02.  The Nasdaq Composite closed less than 0.1 percent lower at 13,068.83 after gaining as much as 1.6 percent earlier in the day. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell more than 6 percent to 22.56.

Cyclical stocks, or those most sensitive to an economic rebound, led the gains, resuming the trend seen in the past few weeks.  Energy stocks were also boosted by rising oil prices as investors shrugged off a jump in weekly U.S. crude stockpiles for the second-straight week.  As such, the Energy Select Sector SPDR Fund (XLE) rose 2.53 percent on the day and is up 41 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 Fund (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 breaking out above the closely watch 50% Fibonacci retracement.  The overall technical backdrop remains supportive of further advance. This week’s upside follow-through confirmed last week’s bullish breakout and opened up for a test of the more important resistance near the 57 zone, of the 61.8% Fibonacci retracement.

XLE has support just above 50.  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 9, 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”]

As expected, the S&P moved up to test resistance at the important sentiment 3900 mark after breaking out above the trend channel moving average last week.  In accordance to the Japanese candlestick pattern recognition, Wednesday’s spinning top indicated uncertainty.  Technically speaking, when a spinning top forms after an upswing in the market, it can be an indication of a pending reversal, as the indecision in the market is representative of the buyers losing momentum.  Perhaps the negative Money Flow measure is the best illustration of the bears’ case.  These elements suggested that risk is greater to the downside in the medium term.  With this in mind, we’d look to trim positions into short-term market rallies.

As for support, S&P must holds above 3800 on a closing basis to prevent a test of the more important support at the 3700-3500 zone.

Short-term trading range: 3800 to 3900.  S&P has support around 3800.  A failure to hold above that level has measured move to around 3700.  Resistance is around 3900.  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 spinning top candlestick pattern in the S&P together with negative Money Flow measure suggested that market is at or very close to a significant near-term top. Near-term risk is to the downside.  Traders should consider buying downside protection on winning positions.

 

Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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