Tag Archives: Archegos Capital

Buy the Dips Remains the Most Profitable Strategy

Editor’s note: this column was originally published on Capital Essence’s CEM News. It’s being republished as a bonus for the loyal readers. For more information about subscribing to CEM News, please click here.

 

Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Tuesday March 30, 2021.

We’ve noted in the previous Market Outlook that: “Friday’s rally pushed the S&P above the lower boundary of the pink band, signify a bullish breakout and upside reversal.  Nevertheless, return of overbought conditions on an intraday basis might put a short-term cap on the upside.  As for strategy, buying into short-term dips remains the most profitable strategy.”  As anticipated, the S&P cut some losses Monday, but was kept in check by falling energy stocks on volatile oil prices after traffic resumed in the Suez Canal, while bank stocks slipped on fears of exposure following the reported liquidation of Archegos Capital.  For the day, the bench mark gauge fell 0.09 percent to 3,971 after falling as much as 0.8 percent earlier. The Nasdaq Composite slipped 0.6 percent to 13,059. The Dow Jones Industrial Average rose 0.30 percent to 33,171.77.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, tumbled more than 5 percent to 20.05.

Chinese big tech and U.S. media remained under pressure after New York City-based Archegos Capital Management was reportedly forced to sell more than $20 billion worth of shares in margin call on Friday.  Nomura warned of a “significant” loss of up $2 billion, while Credit Suisse warned the loss could be “highly significant” on first-quarter results.  As such, the SPDR S&P Bank ETF (KBE) fell 2.59 percent on the day but is up more than 22 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 red (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 February rally ran out of steam just above the prior high set in early 2018.  The March correction is testing support at the late 2020 rising trend line. This week’s bearish trading actions suggested that the support might not hold for long and KBE might have to move to a much lower level to attract new buyers.  A close below 50 on a weekly closing basis will confirm this and a test of the more important support near the 46 zone should be expected.

KBE has resistance near 55.  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 March 26, 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 is basing sideways using the lower boundary of the pink band as support after climbed above that level last week.  This is a positive development but let’s notice that with recent gains, the index is about 1 percent below the lower boundary of the red band, or extreme overbought zone.  As mentioned, the normal behavior for the S&P has been to consolidate and retreated almost every time it traded above that level, the way we had in January, February and mid-March, so there is a high probability that a significant consolidation pattern will again develop in the coming days.  Nonetheless, the overall technical backdrop continues favor the bulls so we believe that any dips are a buying opportunities rather than time to take profits and get out.

Short-term trading range: 3900 to 3950.  S&P has support around 3940.  A failure to hold above that level has measured move to around 3900.  Resistance is around 4000.  A sustain advance above that level has measured move to 4100.

Long-term trading range: 3300 to 4300.  S&P has support near 3600.  A failure to hold above that level has measured move to 3300.  The index has resistance near 4000.  A close above that level has measured move to 4300.

In summary, while overbought condition is likely keeping buyers at bay, the overall technical backdrop remains supportive of further advance.  As for strategy, pullback will present a buying opportunity, while selling into strength may not be the best strategy in a market considered likely to bounce back.

 

Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

© All rights reserved and actively enforced.
Note: This is a free edition of The Market Outlook, a daily CEM News subscriber newsletter. To get this column before market opens together with hundreds of technical trading ideas (including stocks and ETFs) every month, please click here.
Subscribe to CEM News to receive more in-depth research from Capital Essence.