S&P Pullback Presents Buying Opportunity

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Thursday November 21, 2019.

A report that the so-called phase-one trade deal may not be signed before year-end sent equities lower Wednesday with the S&P pulled back 0.38 percent to close at 3,108.46. The Nasdaq Composite dropped 0.51 percent to 8,526.73.  The Dow Jones Industrial Average fell 0.4 percent to 27,821.09.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell less than 1 percent to 12.84.

Apple shares dropped to close 1.2 percent lower along with Broadcom, Analog Devices and Qualcomm all fell about 2 percent amid uncertainty around U.S.-China trade talks.  As such, the iShares PHLX Semiconductor ETF (SOXX) fell 1.18 percent on the day, but is up more than 48 percent year-to-date, outperformed the S&P.  Now the question is whether recent pullback 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 green (buy) – see area ‘A’ in the chart.  SOXX fell below the 127.2% Fibonacci extension after climbed above that level in early November.  This is a negative development but given the magnitude of the October rally, a short-term pullback consolidation isn’t necessarily a bad thing.  It’s giving the bulls a short-term breather before pushing prices higher again.  SOXX has support near 215. If the ETF could hold above that level then a push above 235 would be easier to achieve.  Above it, a more significant resistance is around 277, or the 161.8% Fibonacci extension.

SOXX has support near 215.  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 shifted to bearish (sell).  Last changed November 20, 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”]

As expected, S&P moved down to test support at the important sentiment 3100 mark after recent rally ran out of steam near the lower boundary of the red band, a key technical level.  Market internal has been weakened but downside momentum does not appear strong enough to generate a widespread breakdown.  Perhaps the positive Money Flow measure is the best illustration of the bulls’ case.

Over the next few days, traders should monitor trading behaviors near 3097.  A failure to hold above that level will trigger downside follow-through and a test of the more important support near the 3075 zone should be expected.

Short-term trading range: 3097 to 3113.  S&P has support near 3097.  A failure to hold above that level has measured move to 3075.  The index has resistance near 3113.  A breakout above that level has measured move to 3140.

Long-term trading range: 3000 to 3220.  S&P has support near 3000.  A failure to hold above that level has measured move to 2870.  The index has resistance near 3200.  A close above that level has measured move to 3340.

In summary, our near-term work on price pattern and momentum suggested strongly that the S&P is in a midst short-term pullback correction phase that could last about 5 to 10 trading sessions.  While the near-term technical bias is skewed toward further weakness, the bulls should not get into any serious trouble as long as the market holds above 3075. As for strategy, pullback will present a buying opportunity, while selling into strength may not be the best strategy in a market considered likely to bounce back.

 

Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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