S&P Could Continue To Drift Higher As Trading Sentiment Remains Strong

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Friday May 28, 2021.

We’ve noted in the previous Market Outlook that: “technical pressures are building up as the market dances its way into an increasingly tight trading range. S&P’s 4200 marks the inflection point.  The overall technical backdrop continues favor the bulls so we believe that any dips are a buying opportunities rather than time to take profits and get out.”  As anticipated, S&P closed higher Thursday, added 0.1 percent to 4,200.88, powered by a General-Electric-led rally in industrials, while signs of an improving labor market kept the reopening trade alive as the broader market is on track for a weekly gain.  The Dow Jones Industrial Average rose 0.4 percent to 34,464.64.  The Nasdaq Composite ended the session flat at 13,736.28.  The CBOE Volatility Index (VIX) widely considered the best gauge of fear in the market, fell more than 3 percent to 16.91.

Financial attracted buying support with regional banks racking up gains following a renewed ride higher in rates as the 10-year Treasury yield jumped above 1.6 percent.  Invesco (IVZ), Huntington Bancshares (HBAN), Citizens Financial (CFG) were among the biggest sector gainers.  As such, the SPDR S&P Bank ETF (KBE) rose 1.53 percent on the day and is up about 32 percent YTD, outperformed the S&P.  Now the question is what’s next?  Below is an update look at a trade in KBE.

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 S&P Bank ETF (weekly)

Our “U.S. Market Trading Map” painted KBE bars in green (buy) – see area ‘A’ in the chart.  Over the past few weeks, KBE has been basing sideways using the late 2020 rising trend line as support.  The near-term technical backdrop remains bullish, suggesting that the April sideways congestion is merely a short-term pause which is taking place within the context of a long-term uptrend. Over the next few weeks, traders should monitor trading behavior as the 56.50 zone, or the prior high set in March, is tested as resistance.  A close above that level on a weekly closing basis will trigger acceleration toward the 64 zone, or the 127.2% Fibonacci extension.

KBE has support around 52.  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 May 20, 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 it was the case of late, the S&P continues drifting higher near the lower boundary of the pink band. That level roughly corresponds with the important sentiment 4200 mark.  Money Flow measure climbed above the zero line, indicating a positive net demand for stocks. Momentum indicator trended higher and is fast approaching overbought zone, suggesting upside gains could be limited.

While more backing and filling would not be a surprise, if the S&P could hold above 4170 then a move above the early May high would be easier to achieve.

As for support, the trend channel moving average, currently at 4110, is the line in the sand. That level was significant when the index climbed above it in late 2020.  When strong support is broken it means that near-term buying pressure has finally been exhausted.  With that said, a close below that level is outright bearish and a much deeper pullback should be expected and we’re looking at 4000.

Short-term trading range: 4110 to 4190. S&P has support around 4110.  A failure to hold above that level has measured move to around 4000.  Resistance is around 4200.  A sustain advance above that level has measured move to 4236.

Long-term trading range: 3650 to 4700.  S&P has support near 4000.  A failure to hold above that level has measured move to 3650.  The index has resistance near 4350.  A close above that level has measured move to 4700.

In summary, although return of overbought conditions on an intraday basis is keeping buyers at bay, the early May high, around S&P’s 4236, continues to act as price magnet.  It is possible that S&P could continue to drift higher as trading sentiment remains strong.  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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