Traders Should Consider Buying Downside Protection

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Tuesday May 4, 2021.

Equity market closed mix Monday as signs of a faster reopening of the economy pushed cyclicals corners of the market including energy and materials higher.  The Dow Jones Industrial Average rose 0.7 percent to 34,113.23. The S&P gained 0.3 percent to 4,192.66. The Nasdaq Composite fell 0.5 percent to 13,895.12 as Big Tech stocks pulled back following a strong month.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell nearly 2 percent to 18.31.

Energy led the broader market higher, underpinned by rising oil prices as investors renewed bets on a recovery in global demand despite Covid-19 cases in India that continue to mount.  As such, the Energy Select Sector SPDR Fund (XLE) jumped 2.75 percent on the day and is up 34 percent YTD, outperformed the S&P.  Now the question is what’s next?  Below is an update look at a trade in XLE.

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 – Energy Select Sector SPDR Fund (weekly)

Our “U.S. Market Trading Map” painted XLE bars in green (buy) – see area ‘A’ in the chart.  Over the past weeks XLE has been trending higher after the March correction found support near the 2021 rising trend line, just above the 38.2% Fibonacci retracement.  This week’s upside follow-through confirmed last week’s bullish breakout above the March falling trend line.  The overall technical backdrop remains supportive of further advance.  A close above 51 on a weekly basis will trigger acceleration toward the 58 zone, of the 61.8% Fibonacci retracement.

XLE has support just above 46.  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 bearish (sell).  Last changed April 30, 2021 from bullish (buy) – (see area ‘A’ in the chart).

[Note: for more details analysis, please take a look at our “US Market ETF Trading Map”]

Once again, the S&P moved up to test resistance at the important sentiment 4200 mark.  Money Flow measure flashed a weak bullish signal. The indicator printed a lower high as prices ascending, indicating a lack of commitment among the bulls.  Adding to concerns is the overbought conditions.  This will give the bulls more pressure than they have already had.

For now, 4150 is the line in the sand.  A failure to hold above it indicated that long-term buying pressure has been exhausted and a much deeper pullback should be expected and we’re looking at 4000, based on the trend channel moving average.

On the upside, S&P has 4200 to trade against.  We’d turn particular bullish if the index closes twice above that level.

Short-term trading range: 4150 to 4250.  S&P has support around 4150.  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 4250.

Long-term trading range: 3650 to 4600.  S&P has support near 3900.  A failure to hold above that level has measured move to 3650.  The index has resistance near 4250.  A close above that level has measured move to 4600.

In summary, the fact that the S&P is overbought as it tested key price level that had been successful in repelling price action in the past suggested that upside gains could be limited.  As for strategy, traders should consider reduce exposure into short-term market bounces or at least buying downside protection on winning positions.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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