S&P Rally Attempt Failed Near Formidable Resistance

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Wednesday June 16, 2021.

We’ve noted in the previous Market Outlook that: “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.”  As anticipated, S&P snapped a three-day winning streak Tuesday after hitting an intraday record high of 4,257.19, dipped 0.2 percent to 4,246.59.  The Dow Jones Industrial Average fell 0.3 percent to 34,299.33. The Nasdaq Composite pulled back 0.7 percent to 14,072.86.  The CBOE Volatility Index (VIX) widely considered the best gauge of fear in the market, rose more than 4 percent to 17.03.

Energy led the move higher in cyclicals as oil prices continued to trend near multiple-year highs on expectations for strong energy demand over the summer as easing restrictions boosts travel demand.  As such, the Energy Select Sector SPDR Fund (XLE) rose 1.90 percent on the day and is up more than 48 percent YTD, outperformed the S&P.  Now the question is what’s next?  Below is an update look at a trade in XLE.

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 – Energy Select Sector SPDR Fund (weekly)

Our “U.S. Market Trading Map” painted XLE bars in green (buy) – see area ‘A’ in the chart.  XLE has been on a tear in recent days after the March correction found support near the late 2020 rising trend line.  The late April rally carried the ETF up to the closely watch 57-58 zone, or the 4-year falling moving average and the 61.8% Fibonacci retracement.  The overall technical backdrop remains positive suggesting that the resistance might not hold for long. A close above 58 on a weekly closing basis will bring the 2018 high, just below 80, into view.

XLE has support just above 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”]

Once again the S&P sold off after recent rally found some resistance near the lower boundary of the red band.  That level was tested several times over the past months.  Technically speaking, the longer the index holds below this resistance the stronger it becomes. Adding to concerns is the return of overbought conditions.  Right now the most important thing to watch is trading behavior near 4240.  A failure to hold above that level has a measured move to 4200.  We’d turn particular bearish if the index closes twice below that level.

On the upside, the lower boundary of the red band, or extreme overbought zone, around 4265, represents key resistance.  Technically speaking, 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.

Short-term trading range: 4200 to 4300.  S&P has support around 4240.  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 rally attempt failed at formidable resistance.  If the index fails to hold above 4240, then the next stop will be 4200 with the possibility of a brief breakdown below that level.

 

Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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