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S&P Broke Key Support But Downside Risk Could Be Limited

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 Wednesday April 21, 2021.

We’ve noted in the previous Market Outlook that: “S&P shifted to short-term overbought consolidation phase. 4150 is the line in the sand.  A failure to hold above that level would see an unwelcome pickup in downside volatility and bring the trend channel moving average back into view.”  As anticipated, S&P slipped Tuesday, down 0.68 percent, as rising global coronavirus cases triggered fresh jitters over global growth, prompting investors to hit pause on cyclical stocks.  The Dow Jones Industrial Average fell 0.75 percent and the Nasdaq Composite slumped 0.92 percent.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, jumped more than 8 percent to 18.68.

Financials were also under selling pressure with banks bearing the brunt of the selling exacerbated by a fall in U.S. bond yields. The U.S. 10-year yields slipped to 1.56 percent down 38 basis points.  As such, the SPDR S&P Bank ETF (KBE) fell 3.55 percent on the day but is up more than 21 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 red (sell) – see area ‘A’ in the chart.  Over the past few weeks, KBE has been basing sideways using the late 2020 rising trend line as support after the February rally ran out of steam just above the prior high set in early 2018. This week’s selloff pushed the ETF below the 2020 rising trend line signifies a bearish breakout and downside reversal.  The overall technical backdrop deteriorated following recent decline, suggesting that KBE might have to move to a much lower level to attract new buyers and we’re looking at 48.  A close below 50 on a weekly closing basis will confirm this.

KBE has resistance just above 52.  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 bearish (sell).  Last changed April 20, 2021 from bullish (buy) – (see area ‘A’ in the chart).

[Note: for more details analysis, please take a look at our “US Market ETF Trading Map”]

Key technical development in Tuesday session was a close below the lower boundary of the red band.  Momentum indicator trended lower from overbought zone, suggesting near-term risk is lower.  While seemingly vulnerable to some short-term weaknesses, Money Flow measure is above the zero line, indicating a positive net demand for stocks.  Additionally, support is strong near 4100.  These elements could help minimize downside follow-through and widespread breakdowns.

Short-term trading range: 4100 to 4155.  S&P has support around 4100.  A failure to hold above that level has measured move to around 4055.  Resistance is around 4155.  A sustain advance above that level has measured move to 4200.

Long-term trading range: 3550 to 4500.  S&P has support near 3900.  A failure to hold above that level has measured move to 3550.  The index has resistance near 4200.  A close above that level has measured move to 4500.

In summary, S&P fell below the lower boundary of the red band after climbed above it in early April.  While seemingly vulnerable to further short-term weakness, support is strong near 4100. That zone is too big and too important to fall quickly.  It could help minimize downside follow-through and widespread breakdowns.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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