S&P New Highs Might Not Sustain

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Monday November 4, 2019.

Stocks rose sharply on Friday as investor sentiment got a lift from much stronger-than-expected U.S. jobs data.  The Labor Department’s report that employers added 128,000 jobs in October, more than expected.  The S&P and the Nasdaq Composite hit new intraday highs and set closing highs as well, up 0.97 percent and 1.1 percent respectively. The Dow Jones Industrial Average closed within 12 points of its closing peak of 27,359.16, reached on July 15, rose 1.1 percent to 27,347.36.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell 7 percent to 12.30.

Chip stocks were big winners, with the Philadelphia Semiconductor Index up 2.3 percent to a record close of 1,689.93. Four of the top five performers among Nasdaq 100 stocks were chip stocks, led by Skyworks Solutions (SWKS), up nearly 8 percent.  As such, the iShares PHLX Semiconductor ETF (SOXX) surged 2.30 percent on the day, and is up more than 46 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. SOXX has been on a tear in recent weeks after the September correction found support near the 2019 rising trend line.  Last week’s upside follow-through confirmed the late October bullish breakout above the closely watch 220 zone.  This is a positive development, increased the probability for a rapid advance toward the 230 zone, or the 127. 2% Fibonacci extension.  That level is significant in charting terms.  A sustain advance above it will open up for a test of the 270 zone, or the 161.7% Fibonacci extension.

SOXX has support near 220.  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 moved up to test resistance at the lower boundary of the red band after recent pullback found support near 3025, or the prior high of hit on July 26.  Money Flow measure trended higher from above zero line, indicating an increase in buying pressure.  This is a bullish development but let’s notice that last week’s rally had pushed the index up against the red band, or extreme overbought zone.  As it was the case of late, a trade into the red band often marked short-term market top.  So we’d be cautious against taking large position at this stage.

Short-term trading range: 3000 to 3054.  S&P has support near 3025.  A close below that level has measured move to 3000.  The index has resistance near 3068.  A close above that level has measured move to 3120.

Long-term trading range: 2840 to 3220.  S&P has support near 2840.  A close below that level has measured move to 2700.  The index has resistance near 3080.  A close above that level has measured move to 3220.

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 increase upside exposure on market dips rather than chasing breakouts.

 

Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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