Path With Least Resistance Remains Higher As Long As S&P Holds Above 4200

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Friday June 11, 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 at record highs Thursday, climbed nearly 0.5 percent to 4,239.18, shrugging off the hottest pace of inflation in decades as Treasury yields slipped on signs bond bears are caving in on bets against the Federal Reserve.  The Dow Jones Industrial Average advanced less than 0.1 percent to 34,466.24, while the Nasdaq Composite gained about 0.8 percent to 14,020.33.  The CBOE Volatility Index (VIX) widely considered the best gauge of fear in the market, fell about 10 percent to 16.11.

Health care stocks were the standout performer on the day, led by a jump in Bristol-Myers Squibb Company (BMY) and Bio-Rad Laboratories Inc (BIO).  BMY jumped 3% after reporting a positive update from a late-stage trial of its cancer drug Breyanzi.  As such, the Health Care Select Sector SPDR Fund (XLV) rose 1.71 percent on the day and is up about 11 percent YTD, slightly underperformed the S&P.  Now the question is what’s next?  Below is an update look at a trade in XLV.

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 – Health Care Select Sector SPDR Fund (weekly)

Our “U.S. Market Trading Map” painted XLV bars in green (buy) – see area ‘A’ in the chart. XLV rebounded nicely after recent pullback found support near the 2020 rising trend line. This week’s rally pushed the ETF toward the 127.2% Fibonacci extension.  The overall technical backdrop remains positive suggesting that the resistance might not hold for long.  A close above 128 on a weekly closing basis might trigger acceleration toward the 155 zone, or the 161.8% Fibonacci extension.

XLV has support just below 120.  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 June 4, 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”]

Key technical development in Thursday trading session was a close above the prior high set in May.  Market is short-term overbought following recent advance. Nonetheless, Money Flow measure trended higher from above the zero line, indicating a positive net demand for stocks.  This suggests that the index may extend the uptrend that dominated the market since early 2020.  A consecutive close above 4236 will confirm this.  The next resistance level for the S&P is around the psychological 4300 mark.  That level roughly corresponds with the lower boundary of the red band, or extreme overbought zone.  The normal behavior for the S&P has been to consolidate and retreated almost every time it traded above that level so there is a high probability that a significant consolidation pattern will again develop in this area.

For now, 4200 is the line in the sand.  We’d turn particular bearish if the index closes twice below that level.  With that said, a failure to hold above 4200 indicated that long-term buying pressure has been exhausted and a much deeper pullback should be expected and we’re looking at the high 4100s, based on the trend channel moving average.

Short-term trading range: 4180 to 4300.  S&P has support around 4220.  A failure to hold above that level has measured move to around 4160.  Resistance is around 4260.  A sustain advance above that level has measured move to 4300.

Long-term trading range: 4100 to 4400.  S&P has support near 4100.  A failure to hold above that level has measured move to 3750.  The index has resistance near 4400.  A close above that level has measured move to 4750.

In summary, overbought conditions have returned on an intraday basis so some downside retracement cannot be ruled out this week. However, the near-term technical outlook remains positive, suggesting that the path with least resistance remains higher as long as the S&P holds above 4200.

 

Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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