Positive on Stocks over Short to Medium-term

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Tuesday April 2, 2019.

We’ve noted in the previous Market Outlook that: “S&P broke above the late March falling trend line, signify an upside reversal and bullish breakout.  Nevertheless, the return of overbought conditions on an intraday basis will put a cap on the upside.  As for strategy, traders should consider taking down exposure into overbought strength, which might take the S&P closer to 2860 before a significant pullback unfolds.”  As anticipated, stocks jumped on Monday as strong manufacturing data out of the U.S. and China eased worries of a possible global economic slowdown.  The S&P climbed 1.2 percent to 2,867.19.  The Dow Jones Industrial Average rose 1.3 percent to 26,258.42.  The Nasdaq Composite closed 1.3 percent higher at 7,828.91.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell more than 2 percent to 13.40.

The iShares PHLX Semiconductor ETF (SOXX) outperformed, jumped 2.50 percent on the day and is up nearly 24 percent YTD, amid optimism toward the semiconductor space.  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 lower in a short-term corrective mode after the March rally ran out of steam near the early 2018 highs.  The correction found support near the 2018 falling trend line.  This week’s upside follow-through confirmed last week’s bullish reversal signal and opened up for a retest of the 2018 high, near 199.  A close above that level has measured move to 230, or the 127.2% Fibonacci extension of the 2015 to 2018 upswing.

SOXX has support near 183.  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 March 29, 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 climbed up above the early March high after recent pullback found support just below the lower boundary of the pink band.  Monday’s rally pushed the index above 2860, clearing an import hurdle, signify an upside reversal and bullish breakout.  Momentum has been strengthened but the return of overbought conditions on an intraday basis suggested that upside gains could be limited.  Adding to concerns is the lagging Money Flow measure.  The indicator did not confirm recent breakout as it hovers near the zero line, indicating a lack of commitment.  Technically speaking, recent trading pattern exhibits characteristics of a distribution phase, the period in which smart money sell (distribute) their positions.  In this phase, overall sentiment continues to be optimistic, with expectations of higher market levels. It is also the phase in which there is continued buying by the last of the investors in the market, especially those who missed the big move but are hoping for a similar one in the near future.  So we’d be cautious of taking large position at this stage of a rally.

Short-term trading range: 2750 to 2880.  S&P has support near 2800.  A close below that level has measured move to 2750.  The index has a strong band of resistance between 2830 and 2880.  A close above 2880 will bring the 2018 high, near 2940, into view.

Long-term trading range: 2640 to 2960.  S&P has support near 2750.  A close below that level has measured move to 2640.  The index has resistance near 2850.  A close above that level has measured move to 2960.

In summary, our work on price pattern and momentum suggested that S&P could be in an early stage of a distribution phase, in which overall sentiment continues to be optimistic, with expectations of higher market levels.  On balance, we remain positive on stocks over the short to medium-term.

 

Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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