S&P Stuck In A Trading Range

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Good Morning. This is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Wednesday January 20, 2010.

Stocks rallied Tuesday as bargain hunters stepped in and scooped up names that were beaten down in last week sell off. Indication is that buy-on-dips remains the predominant theme. For the day, the Dow Jones industrial average gained 115 points, or 1.1%, to finish at 10725 – a fresh 15-month high. The S&P 500 index added 14 points, or 1.3%, to settle at 1150 – also a new 15-month high. The NASDAQ composite rose 32 points, or 1.4%, to close at 2320 – a new 16-month high.

Notably shares of shares of JDS Uniphase (JDSU) jumped more than 7% to 8.81 on above the daily average volume after RBC capital upped the rating on the stock of Outperformed from Sector Perform. In fact, Tuesday trading action suggested strongly that the stock is in an early stage of a new up-leg that points to a test of January high at 9.13, then all the way to 9.50, or the 23.6% Fibonacci retracement of the 2006 to 2009 down-leg and January 2008 low. Just so that you know, initially profiled in our January 14 “Swing Trader Bulletin” JDSU had gained about 6% and remained well position.

The graphics below are from our “U.S. Market ETF Trading Map”, which shows the Money Flow measure and trading ranges for JDSU and the S&P 500 index. As shown, 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).

Chart 1.1 – JDS Uniphase (daily).

As shown, JDSU rebounded nicely off support at 8.13, or the white line in the chart. This is a short-term positive and had helped setting the stage for a test of the strong band of resistance between the 9.13 and 9.50 areas, or January high and the 23.6% Fibonacci retracement of the 2006 to 2009 down-leg. That, if take out, could trigger a massive short-covering rally that had the potential propel prices directly into the 14 area, or the 38.2% Fibonacci retracement and the April 2008 downside gap. Immediate support is at 8.03. At this juncture, only a close below that level will begin to compromise the near-term bullish outlook.

Chart 1.2 – S&P 500 index (daily).

The S&P moved up to test the top of its short-term trading range after a pullback to support at 1130, or the July-November rising trend-line and the December 2009 high, was met with a new wave of buying interest. This is pretty encouraging though the odds are skewed toward greater weakness than strength as long as the index remains below key resistance at the 1150 level. Immediate support is at 1130. A close below that level will put 1100, or the bottom of its short-term trading range, into view. Resistance is at 1150. If the bulls manage to take out that level, then we could go straight to 1250.

In summary, it seems to us to us that equity market is trapped in an increasingly tight trading range between the 1130 and 1150 levels on the S&P 500 index. While seasonal bias will most likely keep the bears on their toes, the near-term bias skewed toward greater weakness than strength as long as the index remains below key resistance at the 1150 level.

Thanks and Good Trading!
(By: Michelle Mai for Capital Essence)
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Note: Michelle Mai writes technical analysis for Capital Essence. To receive the daily edition, please subscribe. It’s now available at a monthly rate.

Tags: dow jones industrial average, Fibonacci, JDS Uniphase, JDSU, NASDAQ Composite, RBC capital, s&p 500 index, spx