S&P Oversold Rally Shown Signs of Buyer’s Fatigue

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Tuesday May 28, 2019.

We’ve noted in the previous Market Outlook that: “market internal has been deteriorated as S&P moved down to test key support at the important sentiment 2800 zone.  This area is too big and too important to fall quickly so it should not be surprising to see some backings and fillings in the coming days.”  As anticipated, S&P closed slightly higher Friday, up 0.1 percent to 2,826.06 after Donald Trump said there is still a good possibility of a trade deal with China and that a solution to the Huawei matter could be included in that deal.  The Dow Jones Industrial Average added 0.4 percent to close at 25,585.69. The Nasdaq Composite rose 0.1 percent at 7,637.01.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell more than 6 percent to close at 15.85.

Chip stocks have been under pressure as the U.S. increases pressure on Chinese telecom giant Huawei. Last week, the Trump administration made it harder for U.S. companies to do business with Huawei, before granting a temporary 90-day reprieve for the company.  Chipmakers led tech down as the iShares PHLX Semiconductor ETF (SOXX) fell 0.9 percent on the day but is up nearly 14 percent YTD, outperformed the S&P.  Now the question is whether recent selloff is a pause that refreshes or it’s a beginning of something worse?  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 red (sell) – see area ‘A’ in the chart. Over the past few weeks, has been trending lower in a short-term corrective mode after the late 2018 rally ran out of steam just above 200. Last week’s selloff pushed the ETF below the 1-year moving average, a key technical level based on moving averages. This is a negative development, signify a bearish breakout and downside reversal.  Right now follow-through is the key.  A close below 175 on a weekly basis will confirm the bearish signal and a retest of the more important support near the 150 zone, or the 2018 low, should be expected.

SOXX has resistance near 188.  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 May 22, 2019 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”]

S&P consolidated near the upper boundary of the green band after the early rally attempt ran out of steam near Thursday’s bearish breakaway gap.  Short-term indicators are oversold but problematic.  The index had several opportunities for breaking out over the past weeks, and its failure to stage a meaningful rally is a bearish development.  Friday’s weak close is a clear indication of buyer’s fatigue, suggesting that the S&P might have to move to a much lower level to attract new buyers.  Perhaps the lagging Money Flow measure is the best illustration of the bears’ case.

For now, 2800 is the line in the sand.  A close below that level will trigger another selloff with initial downside target near 2780.

Short-term trading range: 2800 to 2873.  S&P has support near 2800.  A close below that level has measured move to 2780.  The index has resistance near 2842.  A close above that level has measured move to 2873.

Long-term trading range: 2775 to 3000.  S&P has support near 2890.  A close below that level has measured move to 2775.  The index has resistance near 3000.  A close above that level has measured move to 3115.

In summary, S&P’s oversold rally is showing signs of buyer’s fatigue, noting a struggle for the index to get past Thursday’s bearish breakaway gap.  There is a good chance S&P will see some near-term weakness, but the bears will not have any cases unless there is, at least, a close below 2800.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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