S&P Cleared Key Resistance But Upside To Be Limited By Overbought Conditions

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Monday April 12, 2021.

We’ve noted in the previous Market Outlook that: “it’s possible that the S&P might continue drifting higher as trading sentiments remains strong.”  As anticipated, stocks climbed to record levels and closed out Friday at their session highs as Wall Street wrapped up the week with solid gains amid rising reopening optimism   for the day, the S&P gained 0.8 percent to 4,128.80.  The Dow Jones Industrial Average rose 0.89 percent to 33,800.60.  The tech-heavy Nasdaq Composite added 0.5 percent to 13,900.19.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell more than 1 percent to 16.69.

Growth names have found their footing over the past two weeks after being outperformed by value stocks for most of the year. The Russell 1000 growth index, made up largely of technology stocks, outperformed its value counterpart, made up mostly of cyclical stocks such as financials and energy names, for a second week following the pullback in longer-dated Treasury yields.  As such, the iShares Russell 1000 Growth ETF (IWF) rose 0.86 percent on the day and is up nearly 7 percent YTD, slightly underperformed the S&P.  Now the question is what’s next?  Below is an update look at a trade in IWF.

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 – iShares Russell 1000 Growth ETF (weekly)

Our “U.S. Market Trading Map” painted IWF bars in green (buy) – see area ‘A’ in the chart. IWF has been on a tear in recent days after the February pullback found support near the 2020 rising trend line.  Last week’s rally propelled the ETF above the closely watch 255 zone, or the prior high set in early 2021.  This is a positive development, setting the stage for a rapid advance toward the 290 zone, or the 127.2% Fibonacci extension of the 2020-2021 upswing.  A consecutive close above 255 will confirm this.

IWF has support near 242.  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”]

Key technical development in Friday session was a close above the important sentiment 4100 mark. The bullish breakout would be confirmed on another close above 4100 this week, which would support upside follow-through and a test of resistance at the upper boundary of the red band, or extreme overbought zone, currently at 4170.  As mentioned, the normal behavior for the S&P has been to consolidate and retreated almost every time it traded near the upper boundary of the red band so there is a high probability that a significant consolidation pattern will again develop in this area.  Additionally, overbought conditions had returned on a daily basis so it should not be surprising to see some backings and fillings in the coming days.

Short-term trading range: 4100 to 4170.  S&P has support around 4100.  A failure to hold above that level has measured move to around 4035.  Resistance is around 4170.  A sustain advance above that level has measured move to 4100.

Long-term trading range: 3550 to 4500.  S&P has support near 3900.  A failure to hold above that level has measured move to 3550.  The index has resistance near 4200.  A close above that level has measured move to 4500.

In summary, S&P cleared key resistance, breaking out above the important sentiment 4100 mark.  Consecutive close above that level this week would confirm the bullish breakout signal, supporting upside follow-through in the days ahead.  However, market is short-term overbought following recent advance. There could be a sell-off in the offing but it would be shallow if so.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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