Cautiously Optimistic

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Monday September 28, 2020.

Stocks closed higher Friday as tech rebounded with a strong showing from Apple ahead of its iPhone 5G launch widely expected to be just weeks away. The Dow Jones Industrial Average rose 1.3 percent to 27,173.96. The S&P climbed 1.6 percent to 3,298.46. The Nasdaq Composite popped 2.26 percent to 10,913.56.   The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell more than 7 percent to 26.38.

An 11% rally in Novavax (NVAX) pushed up healthcare stocks after the drugmaker said it had started a late-stage trial of its Covid-19 vaccine candidate in the U.K.  As such, the iShares Nasdaq Biotechnology ETF (IBB) jumped 2.13 percent on the day and is up about 11 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.  Over the past few weeks, IBB has been trending lower in a short-term corrective mode after the late March rally ran out of steam near the 146 zone.  The late July correction found some solid footing near the 1-year moving average.  The mid-September upside breakout above the 2-month falling trend line, signify a bullish reversal.  Right now follow-through is the key.  A close above the 138 on a weekly closing basis will confirm the bullish signal and trigger acceleration toward the 146-160 zone.

IBB has support near 126.  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 September 25, 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, the S&PP rebounded nicely after recent pullback found support near the 3200 zone.  This is a short-term positive development, increased the probability for a retest of resistance at the trend channel moving average, around 3350, the level that offered support since the market broke out in April. This history indicated an important role in term of resistance.  A consecutive close above 3350 is required before there is any real prospect of a change in the short-term downward pressure. Staying below that level heralds more losses.

For now, 3200 is the line in the sand.  A failure to hold above it, will bring the bottom of its short-term trading range, around 3100, into view.

Short-term trading range: 3200 to 3350.  S&P has support around 3200.  A failure to hold above that level has measured move to around 3100.  Resistance is around 3350.  A breakout above that level has measured move to around 3380-3400.

Long-term trading range: 3100 to 3730.  S&P has support near 3200.  A failure to hold above that level has measured move to 3100-3000.  The index has resistance near 3600.  A close above that level has measured move to 3900.

In summary, Friday’s impressive recovery rally helped putting the bulls back onto the driver side of the market but it doesn’t mean that we’re out of the woods.  Given the looming resistance near S&P’s 3350, there is no big commitment to accumulate stocks aggressively at this point.  As for strategy, traders should consider buying into market dips rather than chasing breakout.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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