Tag Archives: Morgan Stanley

S&P Upside To Be Limited By Overbought Conditions

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Thursday January 21, 2021.

Equity market closed at record highs Wednesday, underpinned by Netflix-led rally in tech amid backdrop of growing optimism on further stimulus as Joe Biden was sworn in as U.S. President.  The Dow Jones Industrial Average rose 0.8 percent to 31,188.38. The S&P advanced 1.4 percent to 3,851.85. The tech-heavy Nasdaq Composite jumped nearly 2 percent to 13,457.25.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell more than 7 percent to 21.58.

It worth noticing that Morgan Stanley (MS) reported fourth-quarter results that topped analysts’ expectations. Its share was largely unchanged on the day.  Bank of New York Mellon (BK) slumped 7percent, dragging the broader financials sector into the red, despite reporting better-than-expected results on the top and bottom lines for the fourth quarter.  As such, the Financial Select Sector SPDR Fund (XLF) fell 0.42 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 XLF.

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 – Financial Select Sector SPDR Fund (weekly)

Our “U.S. Market Trading Map” painted XLF bars in green (buy) – see area ‘A’ in the chart.  Over the past few weeks, XLF has been basing sideways near the closely watch 31.30 zone, or the prior high set in early 2020, as it works off overbought conditions.  The overall technical backdrop remains supportive of further advance.  So it seems to us that the January rally could carry XLF above the February 2020 high and up to the 38 zone, or the 127.2% Fibonacci extension.  A close above 31.30 on a weekly closing basis will confirm this.

XLF has support near 29.  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 January 19, 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 moved up to test resistance at the red band after recent pullback found support near the lower boundary of the pink band. Money Flow measure trended higher from above the zero line indicating a positive net demand for stocks. Nonetheless, market is short-term overbought, following last week’s rally. This will give the bulls more pressure than they have already had.

For now, S&P has the lower boundary of the red band, currently at 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.

On the downside, support is strong between 3800 and 3750.  Expect the index to draw in buyers in any pullback toward this zone.

Short-term trading range: 3800 to 3930.  S&P has support near 3800.  Below it, a more significant support is around 3750.  Resistance is around 3850.  A sustain advance above that level has measured move to around 3930.

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 fact that market is short-term overbought as S&P approaches key price level that had been successful in repelling price action in the past suggested that upside gains could be limited.  As for strategy, traders should consider buying into market dips rather than chasing breakouts.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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