S&P In Digestive Phase

Editor’s note: this column was originally published on Capital Essence’s CEM News. It’s being republished as a bonus for the loyal readers. For more information about subscribing to CEM News, please click here.


Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Wednesday December 30, 2020.

We’ve noted in the previous Market Outlook that: “the fact that Money Flow measure remains negative as the S&P breakout to new high does not favor a sustain break to the upside.  Our near-term works on price structure and momentum suggested strongly that the S&P remains in for a ‘range-bound’ trading environment.  This is a rally and retreat environment. It is not a trending environment. Short-term traders can anticipate continued volatility with rapid up and down moves in the markets.”  As anticipated, modest gains in early trading brought S&P to an intraday record, but the advance evaporated after U.S. Senate Majority Leader Mitch McConnell blocked immediate consideration of the measure calling for an increase in stimulus payments from $600 to $2,000.  For the day, the bench mark gauge dipped 0.2 percent to 3,727.04, and the Nasdaq Composite fell 0.4 percent to 12,850.22. The Dow Jones Industrial Average gave up 0.2 percent to 30,335.67.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, jumped more than 6 percent to 23.08.

Intel Corp (INTC) jumped 4.93 percent after Reuters reported activist hedge fund Third Point LLC is pushing the chipmaker to explore strategic options, including whether it should remain an integrated device manufacturer.  The iShares PHLX Semiconductor ETF (SOXX) fell 0.26 percent on the day but is up 48 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 lower in a short-term corrective mode after the early November rally ran out of steam near 385.  The overall technical backdrop remains positive, suggesting that recent pullback is merely a shirt-term weakness which is taking place within a context of a longer term upswing.  With this in mind we’d look to increase exposure into short-term dips.  SOXX has resistance near 385.  A close above the level on a weekly closing basis signify a bullish breakout and trigger acceleration toward the 420 zone, or the 161.8% Fibonacci extension.

The 2020 rising trend line, round 356, 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 remains bullish (buy).  Last changed December 28, 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 retreated after the early rally attempt ran out of steam near 3740.  Market internal has been deteriorated but downside momentum does not appear strong enough to generate widespread breakdowns.  For now, 3700-3690 is the line in the sand.  A close below 3690 indicated that long-term buying pressure has been exhausted and a much deeper pullback should be expected and we’re looking at 3573, based on the trend channel moving average.

Short-term trading range: 3700 to 3765.  S&P has support near 3690-3700.  Below it, a more significant support lies at the trend channel moving average, currently at 3573.  Resistance is around 3760.  A sustain advance above that level has measured move to around 3830.

Long-term trading range: 3200 to 3800.  S&P has support near 3200.  A failure to hold above that level has measured move to 2900.  The index has resistance near 3800.  A close above that level has measured move to 4100.

In summary, stocks digested their gains in a consolidation phase that is giving way to a pullback in the S&P.  Support is strong in the 3690-3700 area.  While more backing and filling would not be a surprise, a close below that level would see a massive pickup in volatility.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

© All rights reserved and actively enforced.
Note: This is a free edition of The Market Outlook, a daily CEM News subscriber newsletter. To get this column before market opens together with hundreds of technical trading ideas (including stocks and ETFs) every month, please click here.
Subscribe to CEM News to receive more in-depth research from Capital Essence.