S&P Cleared Key Resistance But Upside To Be Limited By Overbought Conditions

Editor’s note: this column was originally published on Capital Essence’s CEM News. It’s being republished as a bonus for the loyal readers. For more information about subscribing to CEM News, please click here.


Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Monday June 8, 2020.

Stocks rallied on Friday after an unexpected surge in U.S. jobs raised hope that the economy is starting to recover from the coronavirus pandemic.  The Dow Jones Industrial Average surged 3.1 percent to 27,110.98. The S&P rose 2.6 percent to 3,193.93.  The Nasdaq Composite jumped 2 percent to 9,814.08.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell 5 percent to 24.52.

Notably, the PHLX Semiconductor adding to big gains this week, surged to all time high Friday as unexpected job gains raised hopes for an economic comeback and prompted investors to raise their bets on the sector.  As such, iShares PHLX Semiconductor ETF (SOXX) rose 2.45 percent on the day and is up more than 8 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 late February massive selloff found some solid footing at the massive 2-conjoining support near the 176 zone, or the 38.2% Fibonacci retracement of the 2009-2020 major upswing and the 4-year moving average.  Last week’s rally pushed the ETF above the prior high set in late February, signify a bullish breakout and upside reversal.  A consecutive close above 270 will confirm the bullish signal and open up for a test of the 340 zone, or the 127.2% Fibonacci extension.

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 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”]

Key technical development in Friday session was a clear break above the early March recovery high. This is a positive development but let’s notice that with Friday’s gain, the index is now trading above the lower boundary of the red band, or extreme overbought zone. As the chart makes clear, the rallies can continue for some times after the index climbed above the lower boundary of the red band, but in many cases 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.

Money Flow measure is above the zero line, indicating a positive net demand for stocks.  This certainly would argue that the near-term risk remains to the upside.   With that said while more backing and filling would not be a surprise, if the S&P could hold above 3100 then a retest of the February high would be easier to be achieved.

Short-term trading range: 3100 to 3160.  S&P has support near 3100.  A failure to hold above that level has measured move to around 3000.  The index has resistance near 3160.  A breakout above that level has measured move to around 3300.

Long-term trading range: 2190 to 2950.  S&P has support near 3000.  A failure to hold above that level has measured move to 2700.  The index has resistance near 3200.  A close above that level has measured move to 3500.

In summary, S&P cleared key resistance last week. While there seems to be room to go higher, traders must be mindful that the return of overbought conditions on the daily chart.  While overbought condition is normal during a pro-long uptrend, it’s suggested that upside momentum might not sustain without at least a short-term breather.  Short-term traders can anticipate increase short-term volatility with rapid up and down moves in the market.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

© All rights reserved and actively enforced.
Note: This is a free edition of The Market Outlook, a daily CEM News subscriber newsletter. To get this column before market opens together with hundreds of technical trading ideas (including stocks and ETFs) every month, please click here.
Subscribe to CEM News to receive more in-depth research from Capital Essence.v