S&P’s 3300 Too Big And Too Important To Fall Quickly

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Wednesday September 9, 2020.

We’ve noted in the previous Market Outlook that: “near-term technical outlook however, remains negative, suggested that the late day rally could have been short-covering rather than real buying interest.”  As anticipated, stocks tumbled out of gate Tuesday as technology shares were under pressure once again following their worst sell-off in more than five months last week after news that SoftBank made significant option purchases during the run-up in U.S. stocks.  The Nasdaq Composite dropped 4.1 percent to 10,847.69.  The Dow Jones Industrial Average plunged 2.3 percent to 27,500.89. The S&P slid 2.8 percent to 3,331.84.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, gained more than 2 percent to 31.43.

Chip stocks also got hit hard Tuesday following report that the Trump administration is looking at adding Chinese chip giant, SMIC, to the Commerce Department’s “Entity List,” which would bar it from doing business with U.S. firms.  Nvidia and Micron fell 5.6 percent and 3.2 percent, respectively. Applied Materials dropped 8.7 percent. Advanced Micro Devices pulled back by 4 percent.  As such, the iShares PHLX Semiconductor ETF (SOXX) tumbled 4.67 percent on the day but is up more than 14 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 red (sell) – see area ‘A’ in the chart. Since bottoming in late March, the massive spring rally took SOXX well above the prior high set in February. The rally tested and found some resistance near the 127.2% Fibonacci extension.  This week’s downside follow-through pushed the ETF below the 2020 rising trend line, signify a bearish breakout and downside reversal.  A close below 291 on a weekly closing basis will confirm this and a retest of the early July breakout point, around 270, should be expected.

SOXX has resistance near 300.  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 bearish (sell).  Last changed September 3, 2020 from bullish (buy) – (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 moved down to test support at the trend channel moving average after last Friday’s recovery rally was met with a new wave of selling interest.  Momentum is not supportive over the short to medium term but the indicator is much closer to oversold than overbought.  This could help putting a short-term floor under the market. So it should not be surprising to see the index regroup and rebound from near 3300.  Perhaps the positive Money Flow measure is the best illustration of the bull’s case.

For now, the trend channel moving average, around 3300, represents a major price support.  A failure to hold above that level would indicate that momentum is likely shifting and a retest of the bottom of its short-term trading range should be expected.

Short-term trading range: 3300 to 3500.  S&P has support around 3300.  A failure to hold above that level has measured move to around 3250-3170.  Resistance is around 3430-3460.  A breakout above that level has measured move to around 3600.

Long-term trading range: 3100 to 3730.  S&P has support near 3300.  A failure to hold above that level has measured move to 3100.  The index has resistance near 3600.  A close above that level has measured move to 3900.

In summary, this week’s downside follow-through confirmed last week’s bearish reversal signal. While seemingly vulnerable to further short-term weakness, support is strong near 3300. That level is too big and too important to fall quickly.  It could help minimize downside follow-through and widespread breakdowns.

 

Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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