Overbought Conditions Returned On Daily Basis But Momentum Remains Supportive

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Friday October 25, 2019.

We’ve noted in the previous Market Outlook that: “we wouldn’t look too much into Wednesday’s trading action because it keeps the S&P within its short-term consolidation phase.  While further backings and fillings is expected, the fact that the index manages to hold on to most of the October’s gains is pretty impressive, suggesting that S&P might break to new high as soon as the market shakes off excessive bullishness.”  As anticipated, the S&P posted a slight gain on Thursday, led by strong quarterly results from Microsoft, as Wall Street slogged through the busiest day of the earnings season.  The broad index climbed 0.2 percent to 3,010.29. The Nasdaq Composite gained 0.8 percent to 8,185.80. The Dow Jones Industrial Average fell 0.2 percent to 26,782.56. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell more than 2 percent to 13.71.

Twitter shares plummeted 20.9% after the social networking company’s revenue and profit missed estimates, in part due to technical issues with its ad platform. The decline in Twitter shares dragged down the Global X Social Media ETF (SOCL), fell 1.94 percent for the day, but is up over 13 percent year-to-date, underperformed the S&P.  Now the question is whether the selloff is a pause that refreshes or it’s a beginning of something worse?  Below is an update look at a trade in SOCL.

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 – Global X Social Media ETF (weekly)

Our “U.S. Market Trading Map” painted SOCL bars in red (sell) – see area ‘A’ in the chart. Over the past few weeks, SOCL has been trending higher after late September downswing found support near the 1-year moving average, a key technical level based on moving average.  Thursday’s selloff pushed the ETF below the closely watch 31.50, suggesting that the 4-week bearish flag pattern had resolved itself into a new downswing with downside target just below 29.

SOCL has resistance near 32.80.  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 23, 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 after breaking out above the important sentiment 3000 mark on Wednesday.  This week’s rally pushed the index closer to the lower boundary of the red band.  As mentioned, the red zone indicated extreme overbought conditions – a situation that often precursor to a meaningful correction.  Nevertheless, Money Flow measure is above the zero line, indicating a positive net demand for stocks.  This could help putting a short-term floor under the market.

Short-term trading range: 2980 to 3030.  S&P has support near 3000.  A close below that level has measured move to 2980.  The index has resistance near 3020-3030.  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, overbought conditions have returned on a daily basis but momentum remains supportive so downside risk could be limited. It is possible that S&P could continue to drift higher as trading sentiment remains strong.  As for strategy, buying into short-term dips remains the most profitable strategy.

 

Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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