Look to Reduce Exposure into Overbought Strength

Editor’s note: this column was originally published on Capital Essence’s CEM News. It’s being republished as a bonus for the loyal readers. For more information about subscribing to CEM News, please click here.


Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Tuesday October 22, 2019.

Stocks closed higher on Monday, boosted by optimism around U.S.-China trade talks as well as the corporate earnings season.  For the day, the Dow Jones Industrial Average added 0.2 percent to 26,827.64.  The S&P rose 0.7 percent to 3,006.72 while the Nasdaq Composite climbed 0.9 percent to 8,162.99.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell more than 1 percent to 14.10.

Apple hit a new 52-week high, and many of its suppliers within the Philadelphia Semiconductor also outperformed as U.S.-China trade rhetoric remained optimistic.  As such, the iShares PHLX Semiconductor ETF (SOXX) jumped 1.97 percent for the day, and is up more than 40 percent year-to-date, outperformed the S&P.  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 after the September correction found support near the 2019 rising trend line. The October rally is testing resistance at the 220 zone.  That level was tested several times over the past months.  Technically speaking, the more often support is tested the weaker it becomes.  Over the next few days, traders should monitor the rally and retreat behaviors as the 220 zone is tested.  A sustain advance above that level will open up for a test of the 127.2% Fibonacci extension, just above 230.

SOXX has support near 210.  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 October 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”]

Once again, S&P moved up to test the prior high set in July after recent pullback was met with a new wave of buying interest.  With Monday gains, the index is just 0.7percent from hitting the record high of 3,027.98.  Momentum has strengthened and remained favorable over the short to intermediate term.  Nonetheless, Money Flow measure continues to lag price actions.  The indicator hovers near the zero line as prices ascending, indicating a lack of commitment.  Adding to concerns is the overbought conditions.  While overbought condition is normal during a pro-long uptrend, it’s suggested that upside momentum might not sustain without at least a short-term breather.  With this in mind, we’d look to reduce exposure into overbought strength, which might take the S&P closer to 3030 before a significant pullback unfolds.

Short-term trading range: 2960 to 3030.  S&P has support near 2995.  A close below that level has measured move to 2960.  The index has resistance near 3030.  A close above that level has measured move to 3060.

Long-term trading range: 2840 to 3130.  S&P has support near 2840.  A close below that level has measured move to 2700.  The index has resistance near 3070.  A close above that level has measured move to 3130.

In summary, the fact that market is overbought as S&P poked its head into the level that had been successful in repelling price action in the past does not favor a sustain breakout.  The overall technical backdrop however, remains bullish so we’d look to reduce exposure into overbought strength, which might take the S&P closer to 3030 before a significant pullback unfolds.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

© All rights reserved and actively enforced.
Note: This is a free edition of The Market Outlook, a daily CEM News subscriber newsletter. To get this column before market opens together with hundreds of technical trading ideas (including stocks and ETFs) every month, please click here.
Subscribe to CEM News to receive more in-depth research from Capital Essence.