Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Thursday January 23, 2020.
We’ve noted in the previous Market Outlook that: “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.” As anticipated, stocks traded higher in early Wednesday session but gave back most of the early gains to close near the flatline as news of more deaths from the deadly flu-like virus that originated in China soured investor sentiment.
For the day, the S&P added 0.03 percent to 3,321.75. The Dow Jones Industrial Average fell 0.1 percent to 29,186.27. The Nasdaq Composite added 0.1 percent to 9,383.77. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, rose less than 1 percent to close at 12.91.
Chip stocks led the charge higher for tech, with Intel (INTC) and Texas Instruments (TXN) rising 3 percent and 2 percent respectively, as chipmaker ASML’s (ASML) bullish outlook for the sector lifted investor sentiment. As such, the VanEck Vectors Semiconductor ETF (SMH) rose 0.83 percent on the day, and is up more than 4 percent YTD, outperformed the S&P. Now the question is whether the rally has more legs? Below is an update look at a trade in SMH.
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 Semiconductor ETF (weekly)
Our “U.S. Market Trading Map” painted SMH bars in green (buy) – see area ‘A’ in the chart. SMH has been on a tear in recent days after the late November correction found support neat the late 2019 rising trend line. This is a positive development, increased the probability for a test of the 161.8% Fibonacci extension near 158. Traders however, must be mindful that the sector is pretty overbought following the late 2019 massive rally so some short-term digestions should be expected. If SMH can hold above 140 then a test of the 158 should be easier to achieve.
SMH has support near 140. 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”]
As it was the case of late, the S&P continues drifting higher near the lower boundary of the red band. 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.
Nevertheless, the fact that the S&P managed to hold on to most of recent gains despite overbought conditions is impressive. This certainly would argue that the near-term risk remains to the upside. Perhaps the positive Money Flow measure is the best illustration of the bulls’ case.
Resistance is at the lower boundary of the red band, currently at 3333. Above it, a more significant resistance lies the upper boundary of the red band, around 3400. Expect that level to continue to act as price magnet. For now, 3300 is the line in the sand. A failure to hold above that level signify a short-term trend reversal with downside target around 3285-3265. Resistance is at the lower boundary of the red band, currently at 3325.
Short-term trading range: 3315 to 3370. S&P has support near 3315-3300. A failure to hold above that level has measured move to 3285-3265. The index has resistance between 3333 and 3370.
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, the fact that the S&P managed to hold on to most of recent gains despite overbought conditions is impressive. This certainly would argue that the near-term risk remains to the upside. Although overbought condition is keeping buyers at bay, the important sentiment 3400 mark will continue to act as price magnet. 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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