S&P Broke Short-term Downward Trend

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Wednesday February 5, 2020.

Stocks rallied sharply Tuesday on easing fears about the new coronavirus’ impact on global economy as China’s aggressive measures to limit the economic fallout from the virus boosted sentiment.  The S&P gained 1.5 percent to 3,297.59.  The Dow Jones Industrial Average added 1.4 percent to 28,807.63 while the Nasdaq Composite was up 2.1 percent to 9,467.97.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell more than 10 percent to close at 16.05.

Tech stocks that have been hit by fears of the coronavirus slowing the economy bounced on Tuesday. Apple jumped 3.3 percent. Nvidia and Micron rose more than 2.5 percent each.  As such, the iShares PHLX Semiconductor ETF (SOXX) surged 3.12 percent on the day and is up about 1percent YTD, slightly underperformed 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 trending lower in a short-term corrective mode after the December rally ran out of steam near the 161.8% Fibonacci extension of the 2015-2018 upswing. The early January correction found support just above the 240 zone.  This week’s rally pushed the ETF up against minor resistance near the 255 zone.  A close above that level on a weekly basis will trigger acceleration toward the 270 zone, or the 161.8% Fibonacci extension.

SOXX has support near 240.  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 bullish (buy).  Last changed February 4, 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”]

Key technical development in Tuesday session was a close above the lower boundary of the pink band.  That level was significant when the index fell below it last week.  This is a positive development, signify an upside breakout and bullish reversal.  Right now, follow-through is the key.  A close above 3300 tomorrow will confirm Tuesday’s bullish signal and trigger acceleration toward the January high, around 3377.

Short-term trading range: 3217 to 3377.  S&P has support near 3280.  A failure to hold above that level has measured move to 3217.  The index has resistance near 3300.  A breakout above that level has measured move to around 3377.

Long-term trading range: 3120 to 3430.  S&P has support near 3120.  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 3430.

In summary, Tuesday’s rally pushed the S&P above the lower boundary of the pink band, signify a bullish breakout and upside reversal.  Nevertheless, given the looming resistance near 3300, there is no reason to turn particular bullish until this zone is eclipsed.  It will be important to monitor the breakout and retreat behaviors over the next few days to determine whether breakouts are decisive.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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