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S&P Broke Key Support But Downside Risk Could Be Limited

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 Tuesday January 12, 2021.

Stocks fell on Monday as investors assessed equity valuations and the outlook for more Covid-19 relief stimulus, along with ongoing political turmoil.  The House introduced an article of impeachment on Monday, accusing Trump of “incitement of insurrection” following the invasion of the U.S. Capitol, and plans to vote on it this week. The Democrats have given Vice President Mike Pence 24 hours to invoke the 25th Amendment to remove the president, or will move forward the impeachment that could also result in a ban on Trump from taking public office.

For the day, the Dow Jones Industrial Average slid 0.3 percent to 31,008.69. The S&P dipped 0.7 percent to 3,799.61, and the Nasdaq Composite gave up 1.3 percent to 13,036.43.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, surged more than 11 percent to 24.08.

Energy and healthcare helped keep a lid on losses.  Energy rose more than 1 percent as oil prices turned positive even as concerns over fresh lockdowns hurting energy demand persisted amid the ongoing pandemic.  As such, the Energy Select Sector SPDR Fund (XLE) rose 1.57 percent on the day and is up 11 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 green (buy) – see area ‘A’ in the chart.  XLF has been on a tear in recent days after the mid-December correction found support near the 1-year moving average.  That level was significant when the ETF fell below it in 2018.  This week’s upside follow-through confirmed last week’s bullish reversal signal.  The overall technical backdrop remains supportive of further advance.  Over the next few days, traders should monitor the rally and retreat behavior as the 45 zone, or the 38.2% Fibonacci retracement is tested as resistance. A close above that level on a weekly closing basis will trigger acceleration toward the 51 zone, or the 50% Fibonacci extension.

XLE has support near 37.  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 6, 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”]

S&P retreated after the early January rally found resistance just above the important sentiment 3800 zone. Key technical development in Monday session was a close below 3800.  Momentum indicator shifted lower from near overbought zone, suggesting near-term risk is lower.  While seemingly vulnerable to some short-term weaknesses, Money Flow measure is above the zero line, indicating a positive net demand for stocks.  Additionally, support is strong between 3725-3700.  These elements could help minimize downside follow-through and widespread breakdowns.

Short-term trading range: 3725 to 3870.  S&P has support near 3780.  Below it, a more significant support is around 3725.  Resistance is around 3870.  A sustain advance above that level has measured move to around 4000.

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 fell below the important sentiment 3800 mark after climbed above it last week.  While seemingly vulnerable to further short-term weakness, support is strong between 3725-3700. That zone is too big and too important to fall quickly.  It could help minimize downside follow-through and widespread breakdowns.

 

Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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