S&P Could Continue to Drift Higher As Trading Sentiment Remains Strong

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Friday January 10, 2020.

Stocks closed higher Thursday following reports that the partial U.S.-China trade deal would be concluded as soon as next week.  The S&P climbed 0.7 percent to 3,274.70.  The Dow Jones Industrial Average gained 0.7 percent to 28,956.90. The Nasdaq Composite advanced 0.8 percent to 9,203.43.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell more than 6 percent to close at 12.54.

With hopes running high that the world’s largest two economies may find a resolution to their months-long trade war sooner rather than later, investors piled into tech stocks.  Advanced Micro Devices (AMD).jumped 2.4 percent after Mizuho upgraded it to buy, saying the 2020 server market could be stronger than current consensus, raising the prospect of higher growth for the chipmaker.  As such, the iShares PHLX Semiconductor ETF (SOXX) rose 0.63 percent on the day and was up 60 percent in 2019, 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 basing sideways near the 250 zone as it works off overbought conditions.  This week’s rally pushed the ETF above the prior high set in early January, signify a bullish breakout and upside reversal.  This is a positive development, opened up for a test of the more important resistance near the 274 zone, or the 161.8% Fibonacci extension.

SOXX has support near 230.  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 January 8, 2020 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”]

The S&P trades in broad trading bands that define the trend behavior. The upswing was very rapid with some short-term consolidation near each of the significant support or resistance levels. These support and resistance levels also define the limits and barriers to any future rally and uptrend development.

S&P continues drifting higher near the lower boundary of the red after recent pull back found support just above the important sentiment 3200 mark.  Money Flow measure flashes a weak bull signal as it trended higher from above the zero but still unable to take out the December peak, indicating less money’s chasing stocks higher.  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.  While these elements might slightly affect trading sentiment over the coming days, momentum remains supportive so downside risk could be limited.  With this in mind we’d look to purchase stocks during short-term dips in the market rather than chasing breakouts.

For now, 3200 is the line in the sand.  A close below that level will trigger another selloff with initial downside target near 3140.  Resistance is at the lower boundary of the red band, currently at 3278.  As mentioned, the normal behavior for the S&P has been to consolidate and retreated almost every time it traded above that level so there is a high probability that a significant consolidation pattern will again develop in this area.

Short-term trading range: 3250 to 3265.  S&P has support near 3250.  A failure to hold above that level has measured move to 3200.  The index has resistance near 3278.  A breakout above that level has measured move to 3340.

Long-term trading range: 3050 to 3210.  S&P has support near 3130.  A failure to hold above that level has measured move to 3000.  The index has resistance near 3300.  A close above that level has measured move to 3450.

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, traders should consider purchase stocks during short-term dips in the market and stay bullish.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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