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S&P Vulnerable To Short-term Setback

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Friday January 15, 2021.

Stocks closed lower Thursday as losses in technology stocks offset gains in value stocks ahead expectations that President-elect Joe Biden will unveil a more than $1 trillion fiscal package to boost the economy.  The Dow Jones Industrial Average slipped 0.2 percent to 30,991.52. The Nasdaq Composite dipped 0.1 percent to 13,112.64. The S&P gave up 0.4 percent to 3,795.54.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, rose nearly 5 percent to 23.25.

Energy and energy related stocks edged higher on Thursday, boosted by a weak dollar and bullish signals from Chinese import data but pressured by renewed worries about global oil demand due to surging coronavirus cases in Europe and new lockdowns in China.  Brent crude oil futures rose 0.5 percent to $56.32 a barrel. U.S. West Texas Intermediate (WTI) settled 1.25 percent higher at $53.57 per barrel.  As such, the Energy Select Sector SPDR Fund (XLE) jumped 2.96 percent on the day and is up more than 17 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 early December correction found support near the 1-year moving average, a key technical level based on moving averages.  This week’s rally pushed the ETF up against the closely watch 45 zone, or the 38.2% Fibonacci retracement and the June 2020 recovery high.  The overall technical backdrop remains supportive of further advance.  A close above 45 on a weekly closing basis will trigger acceleration toward the 50 zone, or the 50% Fibonacci retracement.

XLE has support near 39.  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 January 14, 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”]

S&P retreated after the early rally attempt ran out of steam near the lower boundary of the red band.  Momentum indicator shifted lower from the level that has been successful in repelling price actions over the past months, suggesting market is due for some kind of a pullback the way we had in November and December.

For now, 3750 is the line in the sand.  A close below that level has measured move to around 3660, based on the trend channel moving average.  That’s about 3-4 percent pullback, the way we’ve had over the past few months.  So it would be a normal, probably refreshing activity to have come down.  Perhaps the positive Money Flow measure is the best illustration of the bull’s case.

On the upside, S&P has the lower boundary of the red band, around 3850, to trade against.  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: 3750 to 3850.  S&P has support near 3750.  Below it, a more significant support is around 3660.  Resistance is around 3850.  A sustain advance above that level has measured move to around 3940.

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, S&P developed a high volatility with fast up and down moves near the lower boundary of the red band.  While market seems vulnerable to some downside retracement over the short-term, we’re long-term positive for S&P as we believe selloff would be shallow and quick.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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