S&P Vulnerable To Short-term Setback

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Tuesday April 6, 2021.

S&P closed at record highs Monday, rose 1.41 percent to 4,076.72, as tech and reopening stocks surged on signs the red-hot economic recovery is set to continue ahead of quarterly earnings season.  The Dow Jones Industrial Average added 1.13 percent to 33,527.19.  The Nasdaq Composite was up 1.67 percent to 13,705.59.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, rose more than 3 percent to 17.93.

Tesla shares popped more than 4% as the electric vehicle company reported production and delivery figures that broadly beat expectations.  As such, the Consumer Discretionary Select Sector SPDR Fund (XLY) jumped 2.27 percent on the day and is up about 8 percent 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.  XLY has been on a tear in recent days after the early February correction found support near the 1-year moving average.  The March rally pushed the ETF up against the prior high set in February.  The overall technical backdrop remains supportive of further advance. So it seems to us that the rally could carry XLY above the February high and up to the next level of resistance at the 161.8% Fibonacci extension, just above 200.  A close above 174 on a weekly closing basis will confirm this.

XLY has support near 165.  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”]

S&P moved up to test resistance at the upper boundary of its short-term trading range after climbed above the lower boundary of the red band last week.  Technically speaking, 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 November 2020, so there is a high probability that a significant consolidation pattern will again develop in this area.  While seemingly vulnerable to some short-term setbacks, the overall technical backdrop remains supportive of further advance so it would be a normal, probably refreshing activity to have come down.  Perhaps the positive Money Flow measure is the best illustration of the bull’s case.

For now, 4000 is the line in the sand.  A failure to hold above that level will invalidate Monday’s bullish signal and a retest of the more important support near the 3900 zone should be expected.

Short-term trading range: 3980 to 4100.  S&P has support around 4000.  A failure to hold above that level has measured move to around 3950.  Resistance is around 4100.  A sustain advance above that level has measured move to 4150.

Long-term trading range: 3500 to 4500.  S&P has support near 3850.  A failure to hold above that level has measured move to 3500.  The index has resistance near 4200.  A close above that level has measured move to 4500.

In summary, S&P developed a high volatility with fast up and down moves near the red band.  While market seems vulnerable to some downside retracement over the short-term, we’re long-term positive for S&P as we believe selloff would be shallow and quick.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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