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S&P In Narrow Trading Range

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 28, 2021.

We’ve noted in the previous Market Outlook that: “although overbought condition is keeping buyers at bay, S&P’s 4200 continues to act as price magnet.  Short-term traders can anticipate increase short-term volatility with rapid up and down moves in the market.”  As anticipated, S&P close flat Tuesday, down less than 0.1 percent to 4,186.72, as technology stocks stumbled ahead of earnings from Google and Microsoft to offset a climb in cyclicals amid data showing the U.S. consumer remains in good shape.  The Dow Jones Industrial Average also closed flat at 33,984.93. The tech-heavy Nasdaq Composite slid 0.3 percent to 14,090.22.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, dipped less than 1 percent to 17.51.

Industrials were among the best sector gainers on the day, with strong gains in United Parcel Service (UPS) offsetting a drop in General Electric. UPS jumped more than 10 percent after reporting first-quarter earnings and revenue that topped analyst expectations thanks to strong demand from small businesses.  As such, the Industrial Select Sector SPDR Fund (XLI) rose 0.83 percent on the day and is up more than 15 percent YTD, outperformed the S&P.  Now the question is what’s next?  Below is an update look at a trade in XLI.

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 – Industrial Select Sector SPDR Fund (weekly)

Our “U.S. Market Trading Map” painted XLI bars in green (buy) – see area ‘A’ in the chart.  XLI has been on a tear in recent days after breaking out from the sideways trading range in late February.  The March rally pushed the ETF closer to the 127.2% Fibonacci extension, around 104.  That level significant in charting terms.  The overall technical backdrop remains supportive of further advance.  A close above 104 on a weekly closing basis could trigger acceleration toward the 130 zone or the 161.8% Fibonacci extension.

XLI has support around 98.  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 April 23, 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”]

Not much has been changed since last update.  S&P continues basing sideways near the important sentiment 4200 zone.  Money Flow measure is above the zero line, indicating a positive net demand for stocks. Momentum indicator whipsaws below overbought zone, suggesting further backings and fillings likely.

Over the next few days, traders should monitor the rally and retreat behaviors as the 4200 is tested.  That level roughly corresponds with the lower boundary of the red band.  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 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.

For now, 4100 is the line in the sand.  We’d turn particular bearish if the index closes twice below that level.

Short-term trading range: 4100 to 4200.  S&P has support around 4170.  A failure to hold above that level has measured move to around 4100.  Resistance is around 4200.  A sustain advance above that level has measured move to 4290.

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, technical pressures are building up as the market dances its way into an increasingly tight trading range. S&P’s 4100 marks the inflection point.  A failure to hold above key level indicates a change in sentiment and a much deeper pullback should be expected.

 

Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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