S&P Selloff Would 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 January 6, 2021.

Stocks closed higher Tuesday as rallying oil prices on a surprise Saudi production cut sent energy stocks soaring, but upside was limited by uncertainty over the outcome of the Georgia election run-offs.  Oil prices jumped above $50 for the first time since February after Saudi Arabia pledged to cut output by 1 million barrels a day from January levels to offset a rise in output from OPEC+, led by Russia and Kazakhstan.

For the day, the Dow Jones Industrial Average rose 0.6 percent to 30,391.60. The S&P advanced 0.7 percent to 3,726.86, and the Nasdaq Composite climbed nearly 1 percent to 12,818.96.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell 6 percent to 25.34.

Chip stocks attracted strong buying support after Citi turned bullish on Micron Technology (MU).  Citi upgraded its rating on Micron to buy from sell and price target on the stock to $100 from $35, citing favorable backdrop for memory demand and supply over the next year.  Qualcomm (QCOM) jmped almost 3 percent after the chipmaker said its president Cristiano Amon would replace Steve Mollenkopf as chief executive.  As such, the iShares PHLX Semiconductor ETF (SOXX) rose 2.04 percent on the day and nearly 2 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.  SOXX has been on a tear in recent days after the early December correction found support near the 2020 rising trend line.  This week’s rally had helped push the ETF above the early December high, signifies a bullish breakout and upside reversal.  The overall technical backdrop remains supportive of further advance.  This is a positive development, increased the probability for a rapid advance toward the 420 zone, or the 161.8% Fibonacci extension. A close above 385 on a weekly closing basis will confirm this.

SOXX has support near 365.  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 bearish (sell).  Last changed January 4, 2021 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”]

Once again, S&P climbed above the lower boundary of the pink band after falling below that level on Monday.  Momentum indicator shifted higher from the level that has been successful in repelling price actions over the past few months, suggesting that the index is in a midst of a short-term consolidation, the way we had in November and December.  For now, 3700 is the line in the sand.  This level was tested several times over the past weeks.  This history indicated an important role in terms of support.  We’d turn particular bearish if the index closes twice below the 3700.

A close below 3700 has measured move to around 3600, based on the trend channel moving average.  That’s about 4-5 percent pullback, the way we’ve had over the past few months.  So it would be a normal, probably refreshing activity to have come down.

Short-term trading range: 3600 to 3780.  S&P has support near 3700.  Below it, a more significant support lies at the trend channel moving average, around 3600.  Resistance is around 3730.  A sustain advance above that level has measured move to around 3780.

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, S&P developed a high volatility with fast up and down moves between the lower boundary of the red band and the trend channel moving average.  While market seems vulnerable to some downside retracement over the short-term, we believe selloff would be shallow and quick because sideline money will find its way into the market.  As for strategy, buying into short-term market dips remains the most profitable strategy.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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