Expect Some Profit Taking Activities

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Thursday January 10, 2019.

We’ve noted in the previous Market Outlook that: “while S&P’s 2600 continues to act as price magnet, market internal does not appear strong enough to generate sustain breakouts.  As for strategy, traders should consider taking profits into short-term rallies.”  As anticipated, S&P briefly fell into negative territory in the early going, but ultimately rebounded before running into some resistance as it approached the 2600 level shortly after the release of the FOMC minutes from the December policy meeting.  For the day, the bench mark gauge advanced 0.4 percent to 2,584.96.  The Dow Jones Industrial Average climbed 0.4 percent to 23,879.12.  The Nasdaq Composite added 0.87 percent to 6,957.08.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell more than 2 percent to 19.98.

Semiconductor was a notable outperformer on Wednesday, despite Apple supplier Skyworks Solutions lowering its fiscal first quarter guidance.  The iShares PHLX Semiconductor ETF (SOXX) jumped 2.57 percent on the day and is up 3 percent YTD.  Now the question is whether the rally has more legs?  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.  Over the past few weeks, SOXX has been trending higher in a short-term corrective mode after the late 2018 massive selloff found support near the 38.2% Fibonacci retracement of the 2015-2018 upswing.  Right now the most important thing to watch is trading behavior as the 165 zone is tested as resistance.  A close above that level has measured move to 177, or the 1-year moving average.

SOXX has support just below 145.  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 4, 2019 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”]

As expected, S&P extended recent winning streak, heading toward the important sentiment 2600 mark after breaking out above the 38.2% Fibonacci retracement.  Money Flow measure crossed above the zero line, indicating a positive net demand for stocks.  This is a bullish development and opened up for a test of the 2615-2630 zone, the level that provided support throughout the October-December consolidation phase.  It was significant when the S&P broke below it in late December.  This history suggested an important role in term of resistance level so it should not be surprising to see some profit taking activities in the coming days.

Short-term trading range: 2480 to 2630.  S&P has minor support near 2530. A close below that level has measured move to around 2480.  The index has resistance near 2615-2630.  Given the damages done over the past weeks, there is a no reason to turn particularly bullish until this zone is eclipsed.

Long-term trading range: 2340 to 2750.  S&P has support near 2340.  A close below that level on a monthly basis has measured move to 1940.  The index has resistance near 2660.  A close above that level has measured move to 2750.

In summary, while the near-term technical outlook remains bullish, given the looming resistance near S&P’s 2615-2630, there is no big commitment to accumulate stocks aggressively at this point.  What this means is that as the S&P inches into the area of key overhead resistance, aggressive sellers will most likely dips in their toes to see how the market reacts.  So, we’d be cautious against taking large position at this stage.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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