S&P must Hurdle and Sustain above 3100 to Strengthen the Bull case

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

Stocks surged in the final hours of trading on Tuesday, closing out its best quarter in more than two decades despite further signs that the pace of Covid-19 infections is accelerating, forcing several states including California and Texas to roll back plans to lift restrictions on reopening businesses.  The Dow Jones Industrial Average rose 0.9 percent to 25,812.88. The S&P gained 1.5 percent to 3,100.29 and the Nasdaq Composite advanced 1.9 percent to 10,058.77.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell more than 4 percent to 30.43.

Tech, which has recently taken a breather, resumed its climb higher, buoyed by a jump in chip stocks following positive earnings reports from companies in the sector.  Micron Technology (MU) rose 4.8 percent after its fiscal third-quarter results and guidance topped consensus estimates, led by growth in cloud demand, pushing the Philadelphia Semiconductor Index up more than 2 percent.  As such, the iShares PHLX Semiconductor ETF (SOXX) jumped 2.59 percent on the day and is up about 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.  Over the past few weeks, SOXX has been basing sideways near the prior high set in early 2020 as it worked off overbought conditions. The fact that the ETF managed to hold on to all of the March massive gains is impressive, suggesting that it will take a new leg higher as soon as it shakes off excessive optimism.   Right now the most important thing to watch is trading behavior near 276.  A close above that level on a weekly closing basis signify a bullish breakout and trigger acceleration toward the next level of resistance near 338, or the 127.2% Fibonacci extension.

SOXX has support near 252.  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 June 30, 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”]

As expected, S&P moved up to test resistance at the upper limit of its short-term trading range, near the 3100 zone, after recent pullback found some solid footing near the 3000 area.  That level roughly corresponds with the lower boundary of the pink band.  The index is now at a key juncture.  It is testing formidable resistance from below.  Money Flow measure surged to multi-month high, indicating a strong net demand for stocks.  This is a positive development but upside momentum does not appeared strong enough to generate a decisive breakout.  So we’d be cautious against taking large position at this stage of a rally.

On the downside, support is strong near 3000.  A close below that level is outright bearish and a much deeper pullback should be expected and we’re looking at 2900-2700.

Short-term trading range: 3000 to 3155.  S&P has a strong band of support near 3000.  A failure to hold above that level has measured move to around 2900.  The index has resistance near 3100.  A breakout above that level has measured move to around 3180.

Long-term trading range: 2190 to 3600.  S&P has support near 3000.  A failure to hold above that level has measured move to 2700.  The index has resistance near 3300.  A close above that level has measured move to 3600.

In summary, S&P is at key technical juncture.  While the overall technical backdrop remains supportive of further advance, the index must hurdle and sustain above 3100.  The longer the index stays below that level, the more vulnerable it is to lower prices.  This is the real danger in the current market.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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