S&P Overbought But Downside Risk Limited As Momentum Remains Supportive

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Monday November 16, 2020.

Stocks rose on Friday as investors bet again on stocks that would benefit from a potentially effective vaccine and economic recovery next year.  The S&P advanced 1.4 percent to 3,585.15. The Dow Jones Industrial Average jumped 1.4 percent to 29,479.81. The Nasdaq Composite advanced 1 percent to 11,829.29.   The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell about 9 percent to 23.10.

Semiconductor stocks attracted strong buying support thanks to upbeat commentary from Applied Materials (AMAT) following better-than-expected third-quarter earnings. RBC lifted its price target on Applied Materials to $82, from $75, citing the “solid beat and raise.”  The bank said it expects to see “the firm gain market share and beat consensus expectation for fiscal 2021” amid a ramp-up in memory production.  As such, the iShares PHLX Semiconductor ETF (SOXX) rose 1.23 percent on the day and is up about 36 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 green (buy) – see area ‘A’ in the chart.  Over the past few weeks, SOXX has been trending higher after the mid-October correction found support near the 2020 rising trend line.  Last week’s rally pushed the ETF above the closely watch 340 zone, or the 127.2% Fibonacci extension, confirming the early November bullish breakout signal.  This is a positive development, supporting further advance toward the next level of resistance near the 420 zone, or the 161.8% Fibonacci extension.

The 2020 rising trend line, around 300, represents the logical level to measure risk against.  All bets are off should SOXX close below that level.

Chart 1.2 – S&P 500 index (daily)

Short-term technical outlook shifted to bullish (buy).  Last changed November 13, 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”]

S&P rebounded nicely after recent pullback found support near the important sentiment 3500 mark. This is a positive development but let’s notice that Friday’s rally pushed the S&P above the lower boundary of the red band.  Technically speaking, a close above that level indicated extreme overbought conditions. The normal behavior for the S&P has been to consolidate and retreated almost every time it traded above that level so there is a high probability that a significant consolidation pattern will again develop in this area

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: 3400 to 3660.  S&P has minor support near 3560.  A failure to hold above that level has measured move to around 3440-3400.  Resistance is around 3600.  A sustain advance above that level has measured move to 3660.

Long-term trading range: 2750 to 3730.  S&P has support near 3200.  A failure to hold above that level has measured move to 3100.  The index has resistance near 3700.  A close above that level has measured move to 3900.

In summary, overbought conditions have returned on a daily basis but momentum remains supportive so downside risk could be limited. It is possible that S&P could continue to drift higher as trading sentiment remains strong.  As for strategy, buying into short-term dips remains the most profitable strategy.

Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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