S&P In Short-term Overbought Correction But Pullback Could Be Shallow And Quick

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Wednesday October 14, 2020.

We’ve noted in the previous Market Outlook that: “the fact that the S&P is overbought as it moves up to test key price level does not favor a sustain break to the upside.  What this means is that as the index inches into the area of key overhead resistance, aggressive sellers will most likely dips in their toes to see how the market reacts.  Expect increase in near-term volatility.”  As expected, stocks closed lower Tuesday shrugging off mostly bullish quarterly results in the wake of negative vaccine news and fading hopes for a further stimulus package.  The S&P slid 0.6 percent to 3,511.93. The Nasdaq Composite dipped 0.1 percent to 11,863.90.  The Dow Jones Industrial Average dropped 0.6 percent to 28,679.81.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, rose 4 percent to 26.07.

Johnson & Johnson (JNJ) consensus topping quarterly results did little to offset a setback in its Covid-19 vaccine trial. The company said it has paused trials after a patient had fallen ill. Its shares were down 2 percent.  The iShares Nasdaq Biotechnology ETF (IBB) however, rose 0.48 percent on the day and is up about 20 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 higher after the late July selloff found support near the 1-year moving average.  This week’s rally pushed the ETF up against the July high.  The overall technical backdrop remains positive, providing support for further advance. Right now, the most important thing to watch is trading behavior near the 147.  A close above that level on a weekly closing basis has measured move to around 164, or the 127.2% Fibonacci extension.

IBB has support near 135.  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 October 7, 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 retreated after recent rally ran out of steam near the lower boundary of the red band. The index is now testing support at the 3500 zone.  That level was significant when the S&P climbed above it on Monday. It’s now acting as strong support.  Momentum indicator shifted lower from near overbought zone, suggesting further short-term weakness likely.  Nevertheless, Money Flow measure is above the zero line, indicating a positive net demand for stocks.  This certainly would argue that the path with least resistance remains to the upside.

Short-term trading range: 3450 to 3600.  S&P has support around 3500-3480.  A failure to hold above that level has measured move to around 3430.  Resistance is around 3600.

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, an overbought pullback consolidation interrupted the multi-month rally in the S&P.  Although seemingly vulnerable to further short-term weakness, the overall technical backdrop remains positive so sell-off could be shallow because the sideline money will try to fight its way back into the market.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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