Cautiously Optimistic

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Thursday April 22, 2021.

Equity market rallied Wednesday, as investors resumed bets on reopening stocks, shrugging off a fresh wave of Covid-19 cases that threatens to slow the global recovery.  The Dow Jones Industrial Average gained 0.9 percent to 34,137.31. The S&P climbed 0.9 percent to 4,173.42, while the tech-heavy Nasdaq Composite advanced 1.2 percent to 13,950.22.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell more than 6 percent to 17.50.

The reopening trade – bets on stocks set to move higher as the economy reopens were – is back on trading menu. Cruise line stocks led charge higher despite a new wave of Covid-19 infections sweeping across a number of countries including Japan and India that will likely delay the rebound in travel.  As such, the SPDR iShares Transportation Average ETF (IYT) rose 0.89 percent on the day and is up about 20 percent YTD, outperformed the S&P.  Now the question is what’s next?  Below is an update look at a trade in IYT.

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 – SPDR iShares Transportation Average ETF (weekly)

Our “U.S. Market Trading Map” painted IYT bars in green (buy) – see area ‘A’ in the chart.  Over the past few weeks, IYT has been basing sideways using the 127.2% Fibonacci extension as support. That level was significant when the ETF climbed above it in late March.  It is now acting as strong support.  The overall technical backdrop remains bullish so it seems to us that IYT will take a new leg higher as soon as it works off excessive optimism.

IYT has support just above 251.  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 April 21, 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 rebounded nicely off support at the important sentiment 4100 zone. Wednesday’s recovery rally pushed the index up against the lower boundary of the red band.  That level was significant when the index fell below it on Tuesday.  Momentum indicator shifted higher from near overbought zone, indicating an internal strength.  Money Flow measure trended higher from above the zero line, suggesting that the bulls remains in control of the market.  Over the next few days, trader should monitor trading behavior as the important sentiment 4200 zone is tested as resistance.  Some aggressive traders might use this level like a magnet to sell.

Short-term trading range: 4100 to 4200.  S&P has support around 4150.  A failure to hold above that level has measured move to around 4100.  Resistance is around 4200.  A sustain advance above that level has measured move to 4290.

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 rebounded nicely after recent pullback found support near the important sentiment 4100 zone.  Wednesday’s recovery rally helped putting the bulls back onto the driver side of the market but it doesn’t mean that we’re out of the woods.  Given the looming resistance near S&P’s 4200, there is no big commitment to accumulate stocks aggressively at this point.

 

Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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