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S&P In Short-term Reflexive Bounce

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 Monday March 8, 2021.

We’ve noted in the previous Market Outlook that: “Thursday’s selloff pushed the index down to the green band.  The market has historically developed minor support near that level so it should not be surprising to see at least an attempt to rally in the coming days.”  As anticipated, S&P snapped its two-week losing streak Friday, up 2 percent to 3,841.94, on strong jobs data and a rebound in tech as bargain-hunting investors swooped in to take advantage of the recent rout that pushed stocks to oversold levels.  The Dow Jones Industrial Average climbed 1.9 percent to 31,496.30.  The Nasdaq Composite advanced 1.6 percent to 12,920.15.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, tumbled more than 13 percent to 24.66.

Cyclical stocks – those that move in tandem with the economy – were buoyed by signs of a faster recovery, with energy stocks leading to the upside amid rising oil prices. Oil prices added to their gains from Thursday, when OPEC and its allies decided to keep output steady, prompting economists to up their forecasts on energy prices amid an ongoing tightening in global supplies.  As such, the Energy Select Sector SPDR ETF (XLE) jumped 3.74 percent on the day and is up nearly 40 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 ETF (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 January correction found support near the late 2020 rising trend line.  The early February rally pushed the ETF above the closely watch, 50% Fibonacci retracement of the 2018-2020 downswing, near 51. The overall technical backdrop remains supportive of the further advance.  This increases the probability for a rapid advance toward the next level of resistance near the 58 zone, or the 61.8% Fibonacci retracement.

XLE has support near 44.  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 bullish (buy).  Last changed March 5, 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”]

As expected, the S&P rebounded nicely after recent pullback found support near the closely watch 3700 zone.  That level roughly corresponds with upper boundary of the green band. Momentum indicator shifted higher from near oversold zone, allowing additional upside probing.  Over the next few days, traders should monitor trading behavior as the trend channel moving average is tested as resistance.  Some aggressive traders might use this level like a magnet to sell.

Additionally, Money Flow measure is below the zero line, indicating a negative net demand for stocks. This will give the bulls more pressure than they have already had.

With that said, if the market is going to find bottom in the near term, we want to see the S&P establishes some trading ranges and closes above 3900.  Staying below that level heralds more losses.

Short-term trading range: 3700 to 3850.  S&P has support around 3700.  A failure to hold above that level has measured move to around 3470.  Resistance is around 3850.  A sustain advance above that level has measured move to 3900.

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 rebounded nicely after recent pullback found support near the green band.  Our near-term work on price structure and momentum suggested that the index is in a short-term reflexive bounce.  Nevertheless, traders will be looking for the index to close above 3900 before getting aggressively long again.

 

Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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