S&P Shifted To Bullish Digestion Phase

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Monday June 1, 2020.

We’ve noted in the previous Market Outlook that: “S&P could signal an upward trajectory, depending on how it closes over the few days.  There is currently a test of support at the important sentiment 3000 zone.  If the prior resistance turns support then the next leg would be significantly higher and we’re looking at 3100.”  As anticipated, S&P rose slightly on Friday, erasing losses earlier in the session that saw the index briefly dipped below the closely watch 3000 mark, as traders breathed a sigh of relief after Donald Trump signaled no changes to the trade deal with China despite rising tensions.  For the day, the benchmark rose 0.4 percent to 3,044.31. The Dow Jones Industrial Average gave up less than 0.1 percent to 25,383.11.  The Nasdaq Composite jumped 1.2 percent to 9,489.87.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell more than 3 percent to 27.51.

Chip stocks rallied following the news conference, Marvell Technologies and Nvidia were among the biggest gainers jumped 8.8 percent and 4.6 percent respectively.  As such, the iShares PHLX Semiconductor ETF (SOXX) rose 2.56 percent on the day and is up less than 1 percent YTD, outperformed the S&P.  Now the question is what’s next?  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 weeks after the February massive selloff found some sold footing near the 175 zone, or the 38.2% Fibonacci retracement of the 2009-2020 major upswing and the 4-year moving average.  The March rally pushed the ETF up against the 250-270 zone, or the late February breakdown point. That level is significant in charting terms.  A close above 270 on a weekly closing basis signify a bullish breakout and upside reversal with initial target near 340.

SOXX has support near 230.  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 May 18, 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 rebounded nicely after the early selloff attempt found some solid footing near the closely watch 3000 zone.  This is a positive development however, let’s notice that momentum indicator is much closer to overbought zone than oversold following recent advance.  This may put a cap on the upside.  Money Flow measure hold firmly above the zero ling, indicating a positive net demand for stocks.  These elements increased the probability of some backings and fillings in the coming days.

For now, 3000 is the line in the sand.  That level is significant in charting terms.  It must holds on a closing basis to prevent a test of the trend channel moving average, currently at 2773.

S&P has resistance near 3080 while the psychological resistance is at 3100.

Short-term trading range: 2960 to 3080.  S&P has support near 3000.  A failure to hold above that level has measured move to around 2960.  The index has resistance near 3080 while the psychological resistance is at 3100.  A breakout above that level has measured move to around 3130.

Long-term trading range: 2190 to 2950.  S&P has support near 2800.  A failure to hold above that level has measured move to 2500.  The index has resistance near 3150.  A close above that level has measured move to 3500.

In summary, after the May massive rally, stocks digested their gains in a consolidation phase that is giving way to a congestion in the S&P.  Support is strong in the 3000 area.  While more backing and filling would not be a surprise, a close below that level would see a massive pickup in volatility.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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