S&P Broke Short-term Downward Trend

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Monday March 29, 2021.

We’ve noted in the previous Market Outlook that: “S&P rebounded nicely after recent pullback found support near the trend channel moving average.  Our near-term work on price structure and momentum suggested that the index is in a short-term reflexive bounce.”  As anticipated, S&P rose in a broad-based rally on Friday with technology, healthcare and financial stocks providing the biggest lift as investors bet on a recovery that is expected to deliver the fastest economic growth since 1984. For the day, the bench mark gauge jumped 1.66 percent to 3,974.54.  The Dow Jones Industrial Average rose 1.39 percent to 33,072.88.  The Nasdaq Composite added 1.24 percent to 13,138.73.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, tumbled more than 5 percent to 20.05.

Energy stocks surged, tracking a boost in crude prices after a giant container ship blocking the Suez Canal spurred fears of a supply squeeze.  As such, the Energy Select Sector SPDR Fund (XLE) jumped 2.48 percent on the day and is up more than 33 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.  Over the past few days, XLE has been trending lower in a short-term corrective mode after the February rally ran out of steam just above the 50% Fibonacci retracement.  The correction is testing support at the late 2020 rising trend line.  Last week’s bullish trading actions suggested that the support would hold.  The overall technical backdrop remains supportive of further advance.  This increases the probably for a rapid advance toward the 54-57 zone.

XLE has support near 47.  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 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”]

Key technical development in Tuesday session was a close above the lower boundary of the pink band.  That level was significant when the index fell below it last week.  This is a positive development, signify an upside breakout and bullish reversal.  overbought conditions have returned on an intraday basis.  This might put a short-term cap on the upside.

Right now, follow-through is the key.  A close above 4000 this week will confirm Friday’s bullish signal and trigger acceleration toward the upper boundary of its short-term trading range, just below 4100.  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: 3900 to 3950.  S&P has support around 3900.  A failure to hold above that level has measured move to around 3874.  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, Friday’s rally pushed the S&P above the lower boundary of the pink band, signify a bullish breakout and upside reversal.  Nevertheless, return of overbought conditions on an intraday basis might put a short-term cap on the upside.  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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