S&P in Orderly High-level Consolidation

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Wednesday February 19, 2020.

We’ve noted in the previous Market Outlook that: “S&P remains in a short-term consolidation phase that reflects an indecisive market.  While overbought condition is likely keeping buyers at bay, support is strong near 3368.”  As anticipated, S&P closed lower Tuesday but off intraday low as investors weighed a stark warning from tech giant Apple.  For the day, the bench mark gauge dipped 0.3 percent to 3,370.29.  The Dow Jones Industrial Average slid 0.6 percent to 29,232.19.  The Nasdaq Composite eked out a small gain to post a record closing high at 9,732.74.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, jumped more than 8 percent to close at 14.83.

Apple said it would miss its fiscal second-quarter revenue guidance amid a coronavirus hit to iPhone demand and production. The warning on revenue sent shockwaves across the supply chain, with chip stocks in particular showing weakness. Lam Research (LRCX) dropped 4 percent and Taiwan Semiconductor Manufacturing (TSM) fell 3.5 percent.  As such, the iShares PHLX Semiconductor ETF (SOXX) fell 1.28 percent on the day but is up more than 4 percent YTD, roughly in line with 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 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. SOXX has been on a tear in recent days after the late January correction found support near the 250 zone.  The February rally tested and failed just below the closely watch 274 zone, or the 161.8% Fibonacci extension.  Over the next few days, it’d be important to monitor the retreat and rebound behavior as the 250 zone is tested as support.  If the ETF could hold above that level then a move above 274 would be easier to achieve. With that said, a failure to hold above 250 will bring the 1-year moving average, around 220, into view.

SOXX has support near 250.  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”]

The S&P continues basing sideway near support at last week’s bullish breakout point.  Momentum indicator has been trended lower over the past few days but it’s much closer to overbought than oversold zone.  This could continue negatively affect trading sentiment in the coming days. Nonetheless, Money Flow measure is above the zero line, indicating a positive net demand for stocks.  Market internal has been weakened but downside momentum does not appeared strong enough to generate widespread breakdowns.  While more backing and filling would not be a surprise, a close below 3350 would see a massive pickup in volatility.  We’d turn particularly bearish if the index closes twice below that level.

Short-term trading range: 3350 to 3398.  S&P has support near 3350.  A failure to hold above that level has measured move to 3316.  The index has resistance near 3399.  A breakout above that level has measured move to around 3467.

Long-term trading range: 3200 to 3350.  S&P has support near 3200.  A failure to hold above that level has measured move to 3030.  The index has resistance near 3380.  A close above that level has measured move to 3550.

In summary, the big picture remains the same.  There’s an orderly high-level consolidation period near S&P’s 3350-3385, which represented the digestion period in the aftermath of the February rally.  Market internals had been deteriorated but downside momentum does not appeared strong enough to generate widespread breakdowns.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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