S&P In Reflexive Bounce

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Monday May 17, 2021.

We’ve noted in the previous Market Outlook that: “our near-term works on price structure and momentum suggested strongly that the S&P remains 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.”  S&P ended the week in the red Friday despite a rebound in tech and a rally in economically-sensitive value stocks amid optimism the consumer remains in good shape to support the recovery.  For the day, the bench mark gauge rose 1.5 percent to 4,173.85.  The Dow Jones Industrial Average added 1.1 percent to 34,382.13, and Nasdaq Composite gained 2.3 percent to 13,429.98.  The CBOE Volatility Index (VIX) widely considered the best gauge of fear in the market, tumbled nearly 19 percent to 18.81.

The surprisingly muted retail sales report weighed on the US dollar and benchmark 10-year Treasury yields, which fell to 1.6335 percent. Two-year Treasury yields dipped to 0.1510 percent.  Pullbacks in the dollar and Treasury yields added to the appeal of non-yielding bullion, with spot gold up 0.9 percent at $1,843.11 an ounce.  As such, the VanEck Vectors Gold Miners ETF (GDX) rose 2.46 percent on the day and is up more than 5 percent YTD, underperformed the S&P.  Now the question is what’s next?  Below is an update look at a trade in GDX.

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 – VanEck Vectors Gold Miners ETF (weekly)

Our “U.S. Market Trading Map” painted GDX bars in green (buy) – see area ‘A’ in the chart. The first dominant feature on the chart is the multi-year rising trend.  The second dominant feature of the chart is the downward trend starting in August 2020 which represented the digestion period.  The correction tested and respected support at the 2-year rising trend line.  Last week’s upside follow-through confirmed the early May bullish breakout above the August 2020 falling trend line.  The overall technical backdrop remains supportive of further advance. So it seems to us that the March rally could carry the ETF up to the next level of resistance at the 2020 high, just below 46.

GDX has support around 35.  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 May 14, 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 moved up to test resistance at the lower boundary of the pink band after recent pullback found support at the trend channel moving average. Money Flow measure trended slightly higher from above the zero line, indicating a weak positive net demand for stocks. Momentum has been strengthened but does not appear strong enough to generate widespread breakouts.  These elements indicated further backing and fillings likely.

Over the next few days, traders should monitor trading behaviors as the important sentiment 4200 mark is tested as resistance.  There is no reason to turn aggressive bullish until this level is eclipsed.

As for support, the trend channel moving average, currently at 4064, is the line in the sand.  While more backing and filling would not be a surprise, a failure to hold above that level would see a pickup in volatility and a test of the more important support at the 3940 zone should be expected.

Short-term trading range: 4064 to 4236. S&P has support around 4064.  A failure to hold above that level has measured move to around 3940.  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, S&P tested and held support as the trend channel moving average.  Our near-term work on price structure and momentum suggested that the index is in a reflexive bounce.  Nevertheless, we will be looking for the index to close above the important sentiment 4200 mark before getting aggressively long again.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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