S&P Overbought But Trading Sentiment Remains Supportive

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Wednesday March 17, 2021.

We’ve noted in the previous Market Outlook that: “S&P broke out to new high Monday, signified resumption of the multi-month upswing.  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 4000 before a significant pullback unfolds.”  As anticipated, S&P was down 0.2 percent after hitting a record intraday high of 3,981.30 and the Nasdaq Composite was up 0.1 percent, though had climbed by more than 1 percent intraday. The Dow Jones Industrial Average, meanwhile, fell 0.39 percent.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell more than 1 percent to 19.79.

Big tech were off the day’s highs but still in the green as the U.S. bond yields rising above 1.6 percent, served as remainder of the squeeze on long-duration growth stocks seen earlier this month.  As such, the Technology Select Sector SPDR Fund (XLK) rose 0.75 percent on the day and is up about 3 percent YTD, underperformed 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 trending lower in a short-term corrective mode after the November rally ran out of steam just above the 127.2% Fibonacci extension.  The mid-February correction tested and respected support at the 2020 rising trend line.  The overall technical backdrop remains supportive of further advance.  Right now the most important thing to watch is trading behavior as the February high, near 140 is tested as resistance.  A close above that level on a weekly closing basis signify a bullish breakout and trigger acceleration toward the next level of resistance near the 160 zone, or the 161.8% Fibonacci extension.

XLK has support near 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 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”]

The big picture remains the same.  S&P continues drifting higher near the lower boundary of the red band, or extreme overbought zone.  Momentum indicator is fast approaching the level that has been successfully in repelling price action in the past. This could put a lid on the upside.  Adding to concerns is the lagging Money Flow measure.  The indicator printed a lower high as prices ascending, indicating a lack of commitment among the bulls.  These elements will negatively affect trading sentiment in the coming days. Right now the most important thing to watch is trading behavior as the 4000 zone is tested as resistance.  That level roughly corresponds with the lower boundary of the red band.  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.

For now, 3900 is the line in the sand.  This level was tested several times over the past weeks.  This history indicated an important role in terms of support.  We’d turn particular bearish if the index closes twice below that level.

Short-term trading range: 3900 to 4000.  S&P has support around 3950.  A failure to hold above that level has measured move to around 3885.  Resistance is around 4000.  A sustain advance above that level has measured move to 4040.

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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