S&P Could Test 4300 On Overbought Strength

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Tuesday June 15, 2021.

We’ve noted in the previous Market Outlook that: “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.”  As anticipated, S&P traded lower for most of Monday session amid some warning of a hawkish surprise from the Federal Reserve later this week before buyers stepped in near the close and pushed prices higher.  For the day, the bench mark gauge gained about 0.2 percent to a record close 4,255.15.  The Nasdaq Composite was up 0.74 percent to close a record high of 14,174.14.  The Dow Jones Industrial Average slipped nearly 0.32 percent to 34,393,75. The CBOE Volatility Index (VIX) widely considered the best gauge of fear in the market, rose about 5 percent to 16.35.

Financials slipped more than 1 percent, paced by a drop in banking stocks after JPMorgan’s chief executive Jamie Dimon warned the that pandemic-led boom in trading revenue for JPMorgan could be nearing an end.  Fixed-income trading revenue JPMorgan will be just above $6 billion in the second quarter, Dimon said Monday at a Morgan Stanley virtual conference.  JPMorgan Chase & Co (JPM), Citigroup (C) and Goldman Sachs Group (GS) were down more than 1 percent.  As such, the SPDR S&P Bank ETF (KBE) fell 1.47 percent on the day but is up more than 26 percent YTD, outperformed the S&P.  Now the question is what’s next?  Below is an update look at a trade in KBE.

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 – SPDR S&P Bank ETF (weekly)

Our “U.S. Market Trading Map” painted KBE bars in sell (sell) – see area ‘A’ in the chart.  Over the past few weeks, KBE has been trending lower in a short-term corrective mode after the April rally ran out of steam near the prior high set in late March.  This week’s selloff pushed the ETF down to the closely watch 52 zone, or the early 2018 high and the late 2021 rising trend line.  The overall technical backdrop deteriorated following recent selloff, suggesting that the support might not hold for long.  A close below 52 on a weekly closing basis will bring the one-year moving average, around 43, into view.

KBE has resistance around 56.50.  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”]

S&P continues drifting higher after breaking above the May high last week.  This is a positive development but let’s notice this week’s rally pushed the index up against the lower boundary of the red band, or extreme overbought zone.  As mentioned, 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.  Nonetheless, the fact that the S&P managed to hold on to most of recent gains despite overbought conditions is impressive.  This certainly would argue that the near-term risk remains to the upside.  With this in mind we’d look to increase upside exposure into short-term market dips.

Short-term trading range: 4200 to 4300.  S&P has support around 4238.  A failure to hold above that level has measured move to around 4200.  Resistance is around 4263.  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 could continue to drift higher as trading sentiment remains strong.  So, it seems to us that the overbought conditions can be sustained for a few days, potentially allowing for a test of 4300 before a significant pullback unfolds.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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