Tag Archives: Federal Reserve

Buying Into Short-term Dips Remains The Most Profitable Strategy

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Thursday February 11, 2021.

We’ve noted in the previous Market Outlook that: “there’s an orderly high-level consolidation period near the lower boundary of the red band, around S&P’s 3900, which represented the digestion period in the aftermath of the late January rally.  Market internal remains bullish but upside momentum does not appeared strong enough to generate widespread breakout. So it should not be surprising to see further backing and fillings in the coming days.”  As anticipated, S&P dipped less than 0.1 percent to 3,909.88 as investors digested the latest wave of quarterly results from corporates and Federal Reserve Chairman Jerome Powell reiterated the need for accommodative monetary policy at a time when data shows runaway inflation worries are somewhat misplaced.   The Nasdaq Composite slid 0.3 percent to 13,972.53.  The Dow Jones Industrial Average added 0.2 percent to 31,437.80.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, rose about 2 percent to 21.99.

Tech stocks underperformed as Amazon, Microsoft and Apple all suffered losses.  As such, the Technology Select Sector SPDR Fund (XLK) fell 0.15 percent on the day but is up about 5 percent YTD, outperformed the S&P.  Now the question is what’s next?  Below is an update look at a trade in XLK.

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 – Technology Select Sector SPDR Fund (weekly)

Our “U.S. Market Trading Map” painted XLK bars in green (buy) – see area ‘A’ in the chart.  Over the past few weeks, XLK has been basing sideways near the 127.2% Fibonacci extension as it works off overbought conditions.  The overall technical backdrop remains supportive of further advance.  With this in mind, we’d look to increase exposure into short-term weakness in anticipated of a rally toward the 160 zone, or the 161.8% Fibonacci extension.

XLK has support near 130.  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 February 2, 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 after the early selloff attempt found support near the lower boundary of the pink band.  As mentioned, 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.  While seemingly vulnerable to some short-term setback the overall technical backdrop remains positive so pullback should be short-lived.

Short-term trading range: 3890 to 3970.  S&P has support around 3900-3890.  A failure to hold above that level has measured move to around 3830.  Resistance is around 3980.  A sustain advance above that level has measured move to 4020.

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, the big picture remains the same.  There’s an orderly high-level consolidation period near S&P’s 3900, which represented the digestion period in the aftermath of the late January rally.  Market internals remains positive and downside momentum does not appear strong enough to generate widespread breakouts.  As for strategy, buying into short-term dips remains the most profitable strategy.

 

Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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