Additional Consolidations Could Unfold Between S&P’s 3100 And 3200 Zone

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 July 13, 2020.

We’ve noted in the previous Market Outlook that: “trading behavior in the S&P remains constrained by a short-term sideways pattern and shown little evidence of a sustainable change in trend.”  As anticipated, S&P traded lower in early Friday session in the wake of a record-surge U.S. COVID-19 cases. The bench mark gauge however, managed to overcome the early weakness and closed higher, up 1 percent to 3,185.04, as promising update on a vaccine helped ease investor jitters over the rapid spread of coronavirus.  The Dow Jones Industrial Average added 1.4 percent to 26,075.30. The Nasdaq Composite rose 0.6 percent to 10,617.44.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell more than 6 percent to 27.29.

Biotech posted record high last weeks amid potential coronavirus vaccine and treatment hopes.  Gilead Sciences said its coronavirus treatment candidate, remdesivir, showed an improvement in clinical recovery and a 62 percent reduction in the risk of mortality compared with standard care. The news sent Gilead shares up more than 2 percent. BioNTech’s CEO also told The Wall Street Journal the company’s coronavirus vaccine candidate could be ready for approval by December.  As such, iShares Nasdaq Biotechnology ETF (IBB) rose 0.5 percent on the week and is up more than 15 percent YTD, outperformed the S&P.  Now the question is what’s next?  Below is an update look at a trade in IBB.

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 Nasdaq Biotechnology ETF (weekly)

Our “U.S. Market Trading Map” painted IBB bars in green (buy) – see area ‘A’ in the chart.  IBB has been on a tear in recent weeks after the mid-May correction found some solid footing near the 125 zone.  The early June rally pushed the ETF above the prior high set in May, signify a bullish breakout and upside reversal.  Last week’s rally pushed IBB above the closely watch 140 zone but Friday weak close indicated an internal weakness and increased the probability for a retest of the 125 zone.  A successful test of this level will increase the probability for a rapid advance toward the 164 zone, or the 127.25 Fibonacci extension.

IBB has support near 125.  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 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”]

Once again, S&P rebounded nicely after the early selloff attempt found support near the lower boundary of the pink band.  Friday’s rally pushed the index up against the early June congestion zone.  That level was tested several times over the past days.  Market internal has strengthened but upside momentum does not appeared strong enough to generate widespread breakouts.

Over the next few days, the most important thing to watch is the rallies and retreats behavior as the early June congestion zone, between 3190 and 3230, is tested as resistance.  A close above it is required to neglect the short-term sideways trading pattern.  With that said, there is no reason to turn particularly bullish until this area is eclipsed.

On the downside, 3100 is the line in the sand.  That level was significant when the index climbed above it in late June.  When strong support is broken it means that near-term buying pressure has finally been exhausted.  With that said, a close below 3100 is outright bearish and a much deeper pullback should be expected and we’re looking at 3000-2900.

Short-term trading range: 3100 to 3230.  S&P has a strong band of support near 3100.  A failure to hold above that level has measured move to around 3000.  There is a strong band of resistance between 3190 and 3230.  A breakout above that level has measured move to around 3300.

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 stuck in sideways trading pattern for more than a week since breaking out in late June.  Short-term technical outlook remains positive but upside momentum does not appear strong enough to generate widespread breakouts.  Near-term, there is a high probability of a period of consolidation activity between S&P’s 3100 and 3200 that may last several weeks if not months.  This consolidation band provides a rally and retreat trading environment for traders.

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