S&P In Rally And Retreat Environment

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Tuesday June 22, 2021.

Equity market closed higher Monday as a sea of green swept across cyclicals and value corners of the market amid a rebound in risk appetite following last week’s rout. For the day, the S&P rose 1.4 percent, the Dow Jones Industrial Average jumped 1.8 percent and the Nasdaq Composite was up 0.79 percent. The CBOE Volatility Index (VIX) widely considered the best gauge of fear in the market, tumbled more than 13 percent to 17.89.

Energy led the broader market higher as investors continued to bet on higher oil demand, while the prospect of the return of Iranian supply was pushed out further after Ebrahim Raisi won the country’s presidential election.  Raisi told reporters that Iran wouldn’t “negotiate for the sake of negotiations” and ruled out any meeting with President Joe Biden.  As such, the Energy Select Sector SPDR Fund (XLE) jumped 4.26 percent on the day and  is up more than 42 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 rebounded nicely after recent pullback found support near the late 2020 rising trendline.  The overall technical backdrop remains supportive of further advance.  Over the next few days, traders should monitor the rally and retreat behaviors as the 58 zone, the 61.8% Fibonacci retracement and the 4-year falling moving average, is tested as resistance.  A close above that level on a weekly closing basis signifies a bullish breakout and increases the probability for a rapid advance toward the 80 zone.

XLE has support around 51.  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 shifted to bullish (buy).  Last changed June 21, 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 rebounded nicely off the trend channel moving average, the level that offered support since the index reached an interim low in late 2020.  Momentum indicator shifted higher from near oversold zone, allowing further Money Flow trended higher from below the zero line, another sign that selling pressure has eased.

Monday’s rally pushed the ETF above the lower boundary of the pink band.  That level was significant when the index fell below it last week.  This is a positive development, increased the probability for a retest of the prior high set last week.

For now, the trend channel moving average, just below the important sentiment 4200 mark represents key support.  The bulls continue to have benefit of the doubts as long as the index holds above that level.

Short-term trading range: 4183 to 4265.  S&P has support around 4200.  A failure to hold above that level has measured move to around 4183.  Resistance is around 4227.  A sustain advance above that level has measured move to 4265.

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 tested and held support at the trend channel moving average. Our near-term works on price structure and momentum suggested strongly that the S&P remains in for a ‘range-bound’ trading environment.  This is a rally and retreat environment. It is not a trending environment. Short-term traders can anticipate continued volatility with rapid up and down moves in the markets.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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