Cautiously Optimistic

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Thursday February 6, 2020.

Stocks closed higher Wednesday as investors bet that efforts to contain the outbreak of the coronavirus and support from the central banks will limit its impact on global growth. The S&P gained 1.1 percent to 3,334.69.  The Dow Jones Industrial Average added 1.7 percent to 29,290.85 while the Nasdaq Composite was up 0.4 percent to 9,508.68.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell more than 5 percent to close at 15.15.

Tesla (TSLA) shares fell 17.18 percent Wednesday after a company executive said that cars initially scheduled for delivery in early February will be delayed due to the outbreak of the new coronavirus.  As such, the First Trust NASDAQ Global Auto Index Fund (CARZ) tumbled 2.78 percent on the day but is up more than 2 percent YTD, slightly underperformed the S&P.  Now the question is whether recent pullback is a pause that refreshes or it’s a beginning of something worse?  Below is an update look at a trade in CARZ.

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 – First Trust NASDAQ Global Auto Index Fund (CARZ) (weekly)

Our “U.S. Market Trading Map” painted CARZ bars in green (buy) – see area ‘A’ in the chart. Over the past few weeks, CARZ has been basing sideways using the 1-year moving average as support.  That level was significant when the ETF climbed above it in late 2019.  This week’s rally pushed the CARZ up against the massive 2-conjoining resistance near the 36 zone, or the 38.2% Fibonacci retracement and the 4-year moving average.  A close above that level on a weekly basis signify a bullish breakout and has measured move to 37-39.

CARZ has support near 33.  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 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”]

Wednesday’s upside follow-through confirmed Tuesday’s bullish reversal signal.  Momentum shifted higher from near oversold zone, a sign that selling pressure had eased.  This is a short-term bullish development, allowing additional upside probing and opened up for a test of the 3337-3360 zone, or the prior high set in January and the lower boundary of the red band.  Technically speaking, 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: 3290 to 3360.  S&P has support near 3290.  A failure to hold above that level has measured move to 3222.  The index has resistance near 3360.  A breakout above that level has measured move to around 3426.

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, Wednesday’s upside follow-through confirmed Tuesday’s bullish reversal signal.  While S&P could continue to drift higher as trading sentiment remains strong, given the looming resistance at the lower boundary of the red band, there is no reason to accumulate stocks aggressively at this point.  As for strategy, traders should consider buying into market dips rather than chasing breakouts.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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