S&P in Early Stage of Overbought Correction

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Monday December 2, 2019.

Stocks closed lower on Friday as investors awaiting a concrete trade deal took some money off the table after a strong month.  For the day the Dow Jones Industrial Average dipped 0.4 percent to 28,051.41. The S&P slipped 0.4 percent to 3,140.98 while the Nasdaq Composite fell nearly 0.5 percent to 8,665.47.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, jumped more than 7 percent to 12.62.

The iShares Expanded Tech-Software ETF (IGV) surged nearly 8 percent in November, its best monthly performance since January. Autodesk shares rose more than 22 percent this month, their biggest one-month gain since May 2017.  Now the question is whether the rally has more legs?  Below is an update look at a trade in IGV.

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 Expanded Tech-Software ETF (weekly)

Our “U.S. Market Trading Map” painted IGV bars in green (buy) – see area ‘A’ in the chart. IGV has been on a tear in recent weeks after the August correction found support near the 1-year moving average.  Last week’s rally pushed the ETF above the 230 zone, or the prior high set earlier this year.  This is a positive development, opened up for a rapid advance toward the next level of resistance at the 127.2% Fibonacci extension, near 240. An upside follow-through this week will confirm this.

IGV has support near 218.  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 November 25, 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 retreated after rally ran into resistance near the 3150 zone.  That level roughly corresponds with the lower boundary of the red band.  In accordance to the Japanese candlestick pattern recognition, last Friday’s bearish engulfing candlestick is a clear indication of supply overwhelming demand.  This is a short-term negative development.  Adding to concerns is the overbought conditions.  These elements suggested that the October rally had run its course and that a short-term correction could be in the wings.

Traders however, must be mindful that while seemingly vulnerable to a short-term weakness, the overall technical backdrop remains positive so pullback will present a buying opportunity, while selling into strength may not be the best strategy in a market that is likely to bounce back.

Short-term trading range: 3120 to 3153.  S&P has support near 3135.  A failure to hold above that level has measured move to 3120-3100.  The index has resistance near 3153.  A breakout above that level has measured move to 3172.

Long-term trading range: 3040 to 3360.  S&P has support near 3040.  A failure to hold above that level has measured move to 2880.  The index has resistance near 3200.  A close above that level has measured move to 3360.

In summary, based upon recent trading action, the S&P is in an early stage of an overbought correction.  Although seemingly vulnerable to further short-term weakness, the overall technical backdrop remains positive so pullback will present a buying opportunity, while selling into strength may not be the best strategy in a market that is likely to bounce back.

 

Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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