Profit Taking Temptation Is Growing

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Wednesday January 22, 2020.

We’ve noted in the previous Market Outlook that: “while the overall technical background remains bullish, the S&P is overbought following recent advance.  While overbought condition is normal during long-term uptrend, it’s suggested that upside momentum might not sustain without at least a short-term breather.  So, there is no big commitment to accumulate stocks aggressively at this point.  There is a high probability that the S&P would consolidate before a new leg higher.   As for strategy, we would look to increase upside exposure on market dips rather than chasing breakouts.”  As anticipated, stocks closed lower Tuesday as selling hit Wall Street following news that the deadly coronavirus had reached the U.S.  The Centers for Disease Control told Reuters that a traveler from China was diagnosed with the first U.S. case of coronavirus in Seattle.

For the day, the S&P slid 0.3 percent to 3,320.79. The Dow Jones Industrial Average fell 0.5 percent to 29,196.04. The Nasdaq Composite dipped 0.2 percent to 9,370.81.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell nearly 2 percent to close at 12.10.

Shares of casino and hotel companies Wynn Resorts and Las Vegas Sands fell more than 6 percent and 5 percent, respectively, amid fears that the coronavirus outbreak in China would dent international travel.  As such, the VanEck Vectors Gaming ETF (BJK) fell nearly 4 percent on the day, but is up about 0.5 percent YTD, underperformed the S&P.  Now the question is whether Tuesday’s selloff is a pause that refreshes or it’s a beginning of something worse?  Below is an update look at a trade in BJK.

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 – VanEck Vectors Gaming ETF (weekly)

Our “U.S. Market Trading Map” painted BJK bars in red (sell) – see area ‘A’ in the chart. This week’s bearish reversal invalidated last week’s bullish breakout above the 61.8% Fibonacci retracement of the 2018 downswing.  This is a negative development, signify a bearish reversal. Over the next few days, traders should monitor trading behaviors near the 41.90 zone.  A close below that level on a weekly basis will trigger a new leg lower with downside target near 40.

BJK has resistance near 43.  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”]

S&P fell below the lower boundary of the red band after climbed above it last week.  As mentioned, a trade above that level indicates extreme overbought conditions.  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.

In accordance to the Japanese candlestick pattern recognition, Tuesday’s narrow range bar indicates uncertainty – traders refuse to press hard one way or the other just because they’re not very sure (or don’t know) about the near-term direction. And this explains why market often uses neutral bar to change direction. Although a single bar doesn’t form a trend so this is not a call for a top, rather it’s a warning signal, a sign in which the market is telling us that it’s ready for a pause.

Over the next few day, traders should monitor trading behavior near 3300.  A failure to hold above that level signify a short-term trend reversal with downside target around 3280-3260.  Resistance is at the lower boundary of the red band, currently at 3325.

Short-term trading range: 3300 to 3360.  S&P has support near 3300.  A failure to hold above that level has measured move to 3280-3260.  The index has resistance between 3325 and 3360.

Long-term trading range: 3150 to 3480.  S&P has support near 3150.  A failure to hold above that level has measured move to 3000.  The index has resistance near 3316.  A close above that level has measured move to 3480.

In summary, with prices stretching out to uncharted territories, temptation to take some money off the table is on a rise amid a growing sense that stocks might be running ahead of fundamentals.  However, as recent trading actions suggested, nobody wants to do too much too soon. So, while sitting on the overcrowded bullish bandwagon, we’ll begin to watch for the next sell signal.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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