Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Friday October 16, 2020.
We’ve noted in the previous Market Outlook that: “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 expect S&P to attract buyers in any pullback toward the 3400 zone.” As expected, S&P traded sharply lower in early Thursday session after data suggesting the resilience seen in the labor market could start to give way without further stimulus to support the broader economy. The bench mark gauge however, pared losses as big tech cut losses and value stocks shined despite uncertainty over stimulus, slid 0.2 percent to 3,483.34. The Dow Jones Industrial Average gave up 0.07 percent to 28,494.20. The Nasdaq Composite pulled back 0.5 percent to 11,713.87. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, rose more than 2 percent to 26.97.
Healthcare stocks were also among the biggest losers on the day, led by 20 percent slump in Vertex Pharmaceuticals (VRTX) after it stopped testing on a protein deficient treatment amid safety concerns. As such, the iShares Nasdaq Biotechnology ETF (IBB) fell 2.27 percent on the day 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. Over the past few weeks, IBB has been trending higher after the late July correction found support near the one-year moving average, a key technical level based on moving averages. This week’s rally pushed the ETF up against the prior high set in summer 2020. 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 zone. A close above that level on a weekly closing basis has measured move to around 165, 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 shifted to bearish (sell). Last changed October 15, 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”]
As expected, S&P moved down to test support at the 3440 zone. That level roughly corresponds with the lower boundary of the pink band. The late day rally suggested that the support would hold, at least for the time being. Money Flow measure hovers just above the zero line, indicating a weak net demand for stocks. The fact that buying pressure deteriorated as the S&P tested key price level suggested that most of the potential buyers at this level had already placed their bets. The next batch of buyers typically sits at a much lower level. While more backing and filling would not be a surprise, a failure to hold above 3440 would see a pickup in volatility and a test of the more important support at the 3400 zone, or the trend channel moving average, should be expected.
Short-term trading range: 3400 to 3600. S&P has support around 3440. A failure to hold above that level has measured move to around 3400. Resistance is around 3500. A sustain advance above that level has measured move to 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, the big picture remains the same. There is an orderly pullback consolidation, which represents digestion period. However, the fact that buying pressure deteriorated as the S&P tested key price level suggested that most of the potential buyers at this level had already placed their bets. The next batch of buyers typically sits at a much lower level. With this in mind we’d look to reduce exposure into intraday bounces.
Thanks and happy trading.
(By：Michelle Mai for Capital Essence)
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