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S&P’s 3800 Continues To Act As Price Magnet

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Monday December 21, 2020.

We’ve noted in the previous Market Outlook that: “overbought conditions have returned on an intraday basis but momentum remains supportive so downside risk could be limited. It is possible that S&P could continue to drift higher as trading sentiment remains strong.  As for strategy, buying into short-term dips remains the most profitable strategy.”  Stocks closed lower but off intraday low Friday as stimulus negotiations look set to drag on into the weekend on differences over the Federal Reserve’s use of emergency lending powers.  Republicans reportedly want to curb the Federal Reserve’s use of emergency lending powers, while Democrats want to grant the central bank more leeway to carry out the measures, casting doubt on hopes a deal would be sealed by the end of the day.

For the day, the S&P dipped 0.4 percent to 13.07 points, to 3,709.41. The Nasdaq Composite lost 0.1 percent to 12,755.64.  The Dow Jones Industrial Average fell 0.4 percent to 30,179.05.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell more than 1 percent to 21.57.

The day of red on Wall Street was led by those tied to the progress of the economy with real estate, consumer discretionary and energy stocks falling more than 1 percent as the threat to demand of fresh restrictions to curb rising Covid-19 cases weighed on sentiment.  As such, the Energy Select Sector SPDR ETF (XLE) fell 1.67 percent on the day and is down more than 34 percent YTD, underperformed 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 moved down to test support at the one-year moving average, a key technical level based on moving averages, after climbed above that level in early December.  The overall technical backdrop remains positive, suggesting that last week’s decline is merely a short-term pause which is taking place within a context of a secondary upswing. With this in mind, we’d look to increase exposure into short-term weakness toward the low 38s zone.  If the ETF could hold above that level then a move above the 45-50 zone, or the June recovery high and the 50% Fibonacci retracement.

The one-year moving average, just above 38, represents the logical level to measure risk against.  All bets are off should XLE close below that level.

Chart 1.2 – S&P 500 index (daily)

Short-term technical outlook remains bullish (buy).  Last changed December 15, 2020 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”]

The big picture remains the same. The S&P continues drifting higher using the lower boundary of the pink band as support.  Money Flow measure is registering a weak bearish signal.  The indicator whipsaw around the zero line as prices ascending, suggesting less and less money are chasing the rally.  Adding to concerns is the return of overbought conditions on the daily chart.  These elements will give the bulls more pressures than they have already had.  While more backing and filling would not be a surprise, if the S&P could hold above the lower boundary of the pink band, currently at 3660, then a move above 3800 would be easier to achieve.

Short-term trading range: 3660 to 3780.  S&P has support near 3690-3660.  Below it, a more significant support lies at the trend channel moving average, currently at 3547.  Resistance is around 3780.  A sustain advance above that level has measured move to around 3900.

Long-term trading range: 3200 to 3800.  S&P has support near 3200.  A failure to hold above that level has measured move to 2900.  The index has resistance near 3800.  A close above that level has measured move to 4100.

In summary, although overbought condition is keeping buyers at bay, S&P’s 3800 continues to act as price magnet.  Short-term traders can anticipate increase short-term volatility with rapid up and down moves in the market.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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