Anticipate Increase In Short-term Volatility

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Tuesday June 1, 2021.

We’ve noted in the previous Market Outlook that: “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.”  As anticipated, S&P closed modestly higher Friday, up 0.1 percent to 4,204.11, snapping a two-week loss on rising technology stocks as falling U.S. bond yields suggests they may be starting to buy the Federal Reserve’s bet that the turn-up in inflation will prove transitory. The Dow Jones Industrial Average rose 64.81 points to 34,529.45.  The Nasdaq Composite added 0.1 percent to 13,748.74.  The CBOE Volatility Index (VIX) widely considered the best gauge of fear in the market, fell about 1 percent to 16.76.

Financials, industrials and energy underperformed the broader market. Industrials were weighed down by a fall in Boeing (BA) after the aircraft maker was forced to temporarily halt deliveries of 787 Dreamliner jets while the Federal Aviation Administration awaits further data to determine whether proposed solutions meet safety standards.  As such, the Industrial Select Sector SPDR Fund (XLI) closed flat on the day but is up about 19 percent YTD, outperformed the S&P.  Now the question is what’s next?  Below is an update look at a trade in XLI.

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 – Industrial Select Sector SPDR Fund (weekly)

Our “U.S. Market Trading Map” painted XLI bars in green (buy) – see area ‘A’ in the chart.  XLI rebounded nicely after recent pullback found support at the 2020 rising trend line, the level that offered support since the ETF reached an interim low in early 2020. The near-term technical backdrop remains bullish, suggesting that recent pullback 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 May high, just below 107, is tested as resistance.  A close above that level on a weekly closing basis will trigger acceleration toward the 128 zone, or the 161.8% Fibonacci extension.

XLI has support around 102.  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 expected, the S&P continues drifting higher near the lower boundary of the pink band after recent pullback found support near the trend channel moving average.  That level roughly corresponds with the important sentiment 4200 mark.  Money Flow measure trended higher from above the zero line, indicating a positive net demand for stocks. Momentum indicator also 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 4115, 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: 4115 to 4236. S&P has support around 4170.  A failure to hold above that level has measured move to around 4115.  Resistance is around 4210.  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 overbought condition is keeping buyers at bay, the early May high around S&P’s 4236 continues to act as price magnet.  Short-term traders can anticipate increase in short-term volatility with rapid up and down moves in the market.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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