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S&P Bullish Doji Pattern Signals Trend Reversal

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Wednesday May 12, 2021.

We’ve noted in the previous Market Outlook that: “S&P shifted to short-term consolidation phase which is taking place within the context of a long-term uptrend.  While near-term risk is greater to the downside, markets are volatile and traders may prefer not to hold large positions overnight.”  As anticipated, S&P closed lower Tuesday but off intraday low, slid 0.9 percent to 4,152.10 but had been down about 2 percent at the lows of the day.  The Dow Jones Industrial Average dropped 1.4 percent to 34,269.16.  The Nasdaq Composite eventually ended the roller-coaster session down less than 0.1 percent to 13,389.43 after shedding 2.2 percent at its low of the day.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, surged 10 percent to 21.52.

Industrials were dragged lower by airlines, with Alaska Air Group Inc (ALK), American Airlines Group (AAL) and United Airlines Holdings Inc (UAL) closed down about 2 percent.  As such, the Industrial Select Sector SPDR Fund (XLI) fell 1.48 percent on the day but is up more than 17 percent YTD, outperformed the S&P.  Now the question is what’s next?  Below is an update look at a trade in XLI.

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 – Industrial Select Sector SPDR Fund (weekly)

Our “U.S. Market Trading Map” painted XLI bars in green (buy) – see area ‘A’ in the chart.  XLI fell below the 127.2% Fibonacci extension after climbed above that level last week.  The overall technical backdrop remains positive, suggesting that the ETF might take a new leg higher as soon as it works off excessive optimism. With this in mind we’d look to increase upside exposure into any short-term dips toward the 100 zone, of the 2020 rising trend line.

A close above 106 on a weekly closing basis signify a bullish breakout and trigger acceleration toward the 161.8% Fibonacci extension, just below the 130 zone.

XLI has support around 100.  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 bearish (sell).  Last changed May 10, 2021 from remains bullish (buy) – (see area ‘A’ in the chart).

[Note: for more details analysis, please take a look at our “US Market ETF Trading Map”]

S&P fell below the lower boundary of the pink band after climbed above that level in early April. The index moved down to test support at the important sentiment 4100 zone.  In accordance to the Japanese candlestick pattern recognition, Tuesday’s bullish long tail candlestick is a clear indication of demand overwhelming supply.  If the textbook stands true then the S&P is at or very close to key turning point.

Momentum indicator trended lower from below the overbought zone, suggesting further short-term weakness likely.  Nevertheless, Money Flow measure is above the zero line, indicating a positive net demand for stocks.  This could help putting a short-term floor under the market.

Over the next few days, traders should monitor trading behavior near 4100.  A failure to hold above that level will trigger a short-term sell signal with downside target near 4046, based on the trend channel moving average.

For now, 4175 is the line in the sand.  A close above that level will trigger acceleration toward the lower boundary of the red band, around 4300.

Short-term trading range: 4100 to 4175.  S&P has support around 4100.  A failure to hold above that level has measured move to around 4046.  Resistance is around 4175.  A sustain advance above that level has measured move to 4255.

Long-term trading range: 3650 to 4700.  S&P has support near 4000.  A failure to hold above that level has measured move to 3650.  The index has resistance near 4350.  A close above that level has measured move to 4700.

In summary, Tuesday’s bullish reversal doji candlestick pattern in the S&P together with the positive Money Flow measure suggested strongly that the market is at or very close to a near-term low.  So it wouldn’t surprise us to see at least an attempt to rally over the next couple of days.

 

Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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