S&P Could Drift Higher Amid Positive Earning Season Influences

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Wednesday April 17, 2019.

We’ve noted in the previous Market Outlook that: “an overbought pullback consolidation interrupted the March rally in the S&P.  Although seemingly vulnerable to further short-term weakness, the overall technical backdrop remains positive so sell-off could be shallow because the sideline money will try to fight its way back into the market.”  As anticipated, the S&P traded with modest gains throughout the day and briefly dipped into negative territory with 30 minutes left of trading where it found buying interest at the 2900 level.  For the day, the S&P added 0.05 percent to 2,907.06.  The Dow Jones Industrial Average rose 0.3 percent to 26,452.66.  The Nasdaq Composite added 0.3 percent to 8,000.23.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, rose more than 2 percent to 12.32.

Semiconductor attracted strong buying support Tuesday.  The group received a boost following news that Apple (AAPL) and Qualcomm (QCOM) settled their royalty dispute for a currently undisclosed amount. Prior to the news, shares of Qualcomm were little changed and soared 23.2 percent after the news.  As such, the iShares PHLX Semiconductor ETF (SOXX) surged 3.2 percent on the day and is up more than 32 percent YTD, outperformed the S&P by a wide margin.  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.  SOXX has been on a tear in recent weeks after the early March correction tested and respected support at the 1-year moving average, a key technical level.  The late March rally pushed the ETF above the early 2018 high, signify a bullish reversal and upside breakout.  This week’s upside follow-through confirmed the early April breakout.  This is a positive development and opened up for a test of the 127.2% Fibonacci extension, around 230.

SOXX has support near 198.  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 April 10, 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”]

S&P continues drifting higher near the lower boundary of the red band.  Short-term momentum indicator reached extreme overbought zone, suggesting the market is a bit ahead of itself.  However, the fact that the S&P managed to hold on to most of recent gains despite short-term overbought condition is impressive.  This certainly would argue that the near-term risk remains to the upside.

Longer term, market internal has weakened but downside momentum does not appear strong enough to generate major breakdowns.  Money Flow measure is flashing a weak bearish signal as it diverged from price action since late March.  The S&P took out the February and March highs while the indicator set a series of lower highs.  While more backing and filling would not be a surprise, a close below 2860 would see a massive pickup in volatility.

Short-term trading range: 2890 to 2940.  S&P has support near 2890.  A close below that level has measured move to 2860.  The index has resistance near 2940.  A close above that level has measured move to around 2970, or the upper boundary of the red band.

Long-term trading range: 2770 to 2990.  S&P has support near 2770.  A close below that level has measured move to 2660.  The index has resistance near 2990.  A close above that level has measured move to 3100.

In summary, the S&P could continue to drift higher amid the positive earning season influences.  So, it seems to us that the overbought conditions can be sustained for a few days, potentially allowing for a test of 2018 high of 2940 before a significant pullback unfolds.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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