Market Downswing may be Mature and Stocks are at Risk to Significant Upside

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Tuesday December 11, 2018.

Stocks closed higher Monday in what was yet another volatile day of trading on Wall Street. The S&P rose 0.2 percent to 2,637.72.  The Dow Jones Industrial Average gained 0.1 percent to 24,423.26.   The tech-heavy Nasdaq Composite jumped 0.7 percent to 7,020.52.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell more than 2 percent to 22.64.

Semiconductor stocks helped lead the tech sector rebound effort as Broadcom (AVGO) extending its post-earnings gains from Friday, up 4.5 percent.  The iShares PHLX Semiconductor ETF (SOXX) rose 1.28 percent on the day but is down more than 6 percent YTD, underperformed the S&P by a wide margin.  Now the question is whether recent rally is a beginning of a new upswing or it’s merely a dead cat bounce?  Below is an update look at a trade in SOXX.

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 – iShares PHLX Semiconductor ETF (weekly)

Our “U.S. Market Trading Map” painted SOXX bars in green (buy) – see area ‘A’ in the chart. The first dominant feature on the chart is the rising trend line starting in 2015.  The second dominant feature of the chart is the downward trend since early 2018, which represented the digestion period.  Over the past few weeks, SOXX has been trending higher in a short-term corrective mode after the September down leg found support near the 38.2% Fibonacci retracement.  Nevertheless, resistance is strong near the 175-179 zone. We’d be cautious against taking large position at this stage.

SOXX has support just below 152.  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 December 4, 2018 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”]

After printed a fresh multi-month low in early Monday session, the S&P reversed and trended sharply higher.  Monday low made a bullish divergence as price made a lower low and Money Flow measure a higher low.  Momentum indicator shifted higher from near oversold zone. These elements increased the likelihood of upside follow-through in the days ahead.

In longer term, 2600 is the line in the sand.  So unless there is a serious breach of this important support, we could be range bounce from here into the end of the year. As for resistance, if the October and November recovery highs, near 2815, is taken out on a closing basis, then the door is opened for a retest of September highs but it’s not expected this week.

Short-term trading range: 2600 to 2766.  S&P has support near 2600.  A close below that level has measured move to 2530, or the early 2018 low.  The index has resistance near 2700.  A close above that level could trigger acceleration toward the 2763-2815 zone.

Long-term trading range: 2350 to 2930.  S&P has support near 2660.  A close below that level on a monthly basis has measured move to 2350.  The index has resistance near 2750-2800.  A close above that level has measured move to 2930.

In summary, positive divergence starts showing up in the Money Flow measure as the S&P tested key supports.  Typically, this is a sign that the downswing may be mature and stocks are, therefore, at risk to a significant upside.  Near-term, there is a high probability of rapid rallies and retreats between 2600 and 2815. Short-term traders can play the range but the market is volatile and tight stops are advisable.

 

Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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