S&P Pressured By Short-term Negative Momentum

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Thursday May 13, 2021.

Equity market closed lower Wednesday as hotter-than-expected inflation data triggered massive selling.  The Labor Department said Wednesday its consumer price index rose 0.8 percent in April, and 4.2 percent year-on-year, the fastest pace since 2008. Excluding food and energy, core CPI increased 0.9 percent in April.  The Dow Jones Industrial Average fell 2 percent to 33,587.66.  The S&P lost 2.1 percent to 4,063.04 while the tech-heavy Nasdaq Composite slid 2.7 percent to 13,031.68.  The CBOE Volatility Index (VIX) widely considered the best gauge of fear in the market, surged more than 28 percent to 27.59.

Investors continued to shun growth stocks like technology, which have higher valuations that are less attractive in an inflationary environment, where money today is worth more than money in the future.  Google-parent Alphabet (GOOGL) fell 3 percent, while Apple (AAPL), Amazon.com (AMZN) and Microsoft MSFT) fell more than 2 percent. Facebook (FB) closed down 1.3 percent.  As such, the Technology Select Sector SPDR Fund (XLK) fell 2.81 percent on the day but is up 1 percent YTD, underperformed the S&P.  Now the question is what’s next?  Below is an update look at a trade in XLK.

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 – Technology Select Sector SPDR Fund (weekly)

Our “U.S. Market Trading Map” painted XLK bars in red (sell) – see area ‘A’ in the chart.  over the past few weeks, XLK has been trending lower in a short-term corrective mode after the late March rally ran out of steam just above the prior high set earlier this year.  This week’s selloff pushed the ETF below the 2020 rising trend line signifies a bearish breakdown and downside reversal.  The overall technical backdrop deteriorated following recent selloff suggesting that the ETF might have to move to a much lower level to attract new buyers and we’re looking at the 128-123 zone, or the 127.2% Fibonacci extension and the 1-year moving average.  A failure to hold above 123 has measured move to around 100.

XLK has resistance around 14.  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 May 10, 2021 from remains bullish (buy) – (see area ‘A’ in the chart).

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

S&P moved down to test support at the trend channel moving average after falling below the lower boundary of the pink band on Tuesday.  Momentum indicator has been weakening following recent selloff. Money Flow measure is on a verge of falling below the zero line, suggesting that the bears were more aggressive as prices dropped than the bulls were as prices ascended.

The index could signal a downward trajectory, depending on how it closes over the next few days.  The trend channel moving average, currently at 4050, represents key support.  If it closes below that level, the next leg is likely lower, and we’re looking at 3940.

On the upside, S&P has 4170 to trade against.  The longer the index holds below that level the more vulnerable it is to lower prices.

Short-term trading range: 3940 to 4170.  S&P has support around 4050.  A failure to hold above that level has measured move to around 3940.  Resistance is around 4170.  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, S&P will have a downward bias this week, pressured by short-term negative momentum but we expect support at the trend channel moving average to remain largely intact.  There is a high probability that market is in for a ‘range-bound’ trading environment.  This is a rally and retreat environment. It is not a trending environment. Short-term traders can anticipate continued volatility with rapid up and down moves in the markets.

 

Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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