S&P Shifted To Short-term Overbought Consolidation Phase

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Tuesday April 20, 2021.

We’ve noted in the previous Market Outlook that: “given the looming resistance near the 4200 zone on the S&P, there is no big commitment to accumulate stocks aggressively at this point.  As for strategy, we’d look to increase upside exposure on pullbacks rather than chasing breakouts.”  As anticipated, S&P fell Monday, down 0.5 percent to 4,163.26, paced by declines in consumer discretionary and technology as investors reined in their bullish bets on stocks ahead of a busy week, with big tech set to report earnings this week.  The Dow Jones Industrial Average fell 0.4 percent to 34,077.63. The tech-heavy Nasdaq Composite lost 1 percent to 13,914.77.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, jumped more than 6 percent to 17.28.

Consumer discretionary was led lower by a fall in casino stocks despite expectations for a strong rebound for the sector as a faster pace of vaccine rollouts boosts efforts to reopen the economy.  Caesars Entertainment Corporation (CZR) and Penn National Gaming (PENN) were among the biggest losers, with the latter down more than 6 percent.  As such, the Consumer Discretionary Select Sector SPDR Fund (XLY) fell 1.12 percent on the day but is up nearly 11 percent YTD, roughly inline with 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 moved down to test support at the prior high set in February 2021 after climbed above that level in early April.  The overall technical backdrop remains bullish suggesting that XLY would take a new leg higher as soon as it works off excessive optimism.  Over the next few days, traders should monitor as the 173 is tested as support.  If XLY could hold above that level then a test of the 161.8% Fibonacci extension, just above 200, would be easier to be achieved.

XLY has support near 173.  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”]

As expected, S&P moved down to test support at the lower boundary of the red band after climbed above that level in early April.  Momentum has weakened but does not appear strong enough to generate major breakdowns. Perhaps the positive Money Flow measure is the best illustration of the bulls’ case.  While more backing and filling would not be a surprise, a close below 4150 would see a massive pickup in volatility.

Short-term trading range: 4130 to 4245.  S&P has support around 4150.  A failure to hold above that level has measured move to around 4130.  Resistance is around 4200.  A sustain advance above that level has measured move to 4245.

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 shifted to short-term overbought consolidation phase. 4150 is the line in the sand.  A failure to hold above that level would see an unwelcome pickup in downside volatility and bring the trend channel moving average back into view.

 

Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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