S&P Cleared Key Resistance But Upside To Be Limited By Overbought Conditions

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Monday June 14, 2021.

We’ve noted in the previous Market Outlook that: “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.”  As anticipated, S&P traded lower in early Friday session as the hotter than expected inflation report triggered some profit taking efforts. The bench mark gauge however, managed to regain all of the early loss and some more to close higher at 4,247, up 0.19 percent.  The Nasdaq Composite advanced 0.4 percent to 14,069.42.  The Dow Jones Industrial Average gained 13.36 points to 34,479.60.  The CBOE Volatility Index (VIX) widely considered the best gauge of fear in the market, fell about 5 percent to 15.65.

Bank stocks were the biggest losers of the fall in rates last week.  The 10-year yield slipped below 1.5 percent.  As such, the Financial Select Sector SPDR Fund (XLF) fell more than 2 percent on the week but is up more than 27 percent YTD, outperformed the S&P.  Now the question is what’s next?  Below is an update look at a trade in XLF.

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 – Financial Select Sector SPDR Fund (weekly)

Our “U.S. Market Trading Map” painted XLF bars in sell (sell) – see area ‘A’ in the chart.  XLF has been trending higher after reaching an interim low in early 2020.  The rally tested resistance at the 127.2% Fibonacci extension.  Last week bearish reversal suggested that the resistance would hold, at least for the time being.  The overall technical backdrop deteriorated following recent selloff.  Over the next few weeks, it’d be important to watch the retreat and rebound behaviors as the 2020 rising trend line, around 37, is tested as support.  A close below that level on a weekly closing basis will confirm last week’s bearish reversal signal and bring the early 2020 high, just below 32, into view.

XLF has resistance just below 39.  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”]

Friday’ upside follow-through confirmed Thursday’s bullish breakout signal.  That level was significant when the S&P tested and failed in early May.  This is a positive development but let’s notice that at 4247, the index is less than 1 percent to lower boundary of the red band, or extreme overbought zone.  Technically speaking, a trade above that level indicates extreme overbought conditions.  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: 4200 to 4300.  S&P has support around 4230.  A failure to hold above that level has measured move to around 4200.  Resistance is around 4265.  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, S&P cleared key resistance, breaking out above the all-time high set in May.  Consecutive close above 4236 this week would confirm last week’s bullish breakout signal, supporting upside follow-through in the days ahead.  However, market is short-term overbought following recent advance. There could be a sell-off in the offing but it would be shallow if so.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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