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S&P Rally Attempt Failed at Formidable Resistance

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Friday April 23, 2021.

We’ve noted in the previous Market Outlook that: “over the next few days, trader should monitor trading behavior as the important sentiment 4200 zone is tested as resistance.  Some aggressive traders might use this level like a magnet to sell.”  As anticipated, S&P erased earlier gains and closed 0.9 percent lower at 4,134.98 on reports President Biden is considering a major capital gains tax hike on the rich.  The Dow Jones Industrial Average dropped 1 percent to 33,815.90 while the Nasdaq Composite slid 0.9 percent to 13,818.41.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, jumped nearly 8 percent to 18.85.

Energy stocks were sluggish despite oil prices recovering some losses as hopes for a recovery in demand remain fragile amid rising global infections.  As such, the Energy Select Sector SPDR Fund (XLE) fell 1.17 percent on the day but is up more than 22 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 red (sell) – see area ‘A’ in the chart.  Over the past few weeks, XLE has been trending lower in a short-term corrective mode after the February rally ran out of steam just above the 50% Fibonacci retracement. Last week’s selloff pushed the ETF below the late 2020 rising trend line, signify a bearish breakout and downside reversal.  This week’s follow-through confirmed last week’s bearish signal and setting the stage for a test of the 45 zone, or the 38.2% Fibonacci retracement.  A failure to hold above that level will bring the 40 zone into view.

XLE has resistance around 51.  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 April 22, 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”]

Once again, S&P retreated after recent rally attempt failed near the lower boundary of the red band.  In theory, the longer the index holds below this resistance the stronger it becomes. Adding to concerns is the Money Flow measure which printed a lower high as prices breakout to new high in early April.  This is an intermediate-term bearish development.  Right now, the most important thing to watch is trading behavior near 4100.  We’d turn particular bearish if the index close twice below that level.  A break below 4100 has a measured move to around 4000, which we’ve determined using the trend channel moving average.

Short-term trading range: 4100 to 4200.  S&P has support around 4100.  A failure to hold above that level has measured move to around 4000.  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, S&P rally attempt failed at formidable resistance.  If the index fails to hold above 4100 this week, then the next stop will be 4000 with the possibility of a brief breakdown below that level.

 

Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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