S&P In Orderly High-Level Consolidation

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Monday January 25, 2021.

We’ve noted in the previous Market Outlook that: “S&P shifted to range bound trading pattern as traders wonder whether more gain is warranted given the massive advance over the past months.”  As anticipated, S&P fell slightly on Friday, retreating from record levels weighed down by energy stocks on falling oil prices and a slump in Intel and IBM on quarterly results that failed to impress investors.  For the day, the broad market gauge dipped 0.3 percent to 3,841.47.  The Dow Jones Industrial Average slid 0.6 percent to 30,996.98.  The Nasdaq Composite rose 0.1 percent to 13,543.06, supported by Big Tech.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, rose nearly 3 percent to 21.91.

Semi underperformed after Intel (INTC) reporting fiscal first-quarter results that topped consensus estimates, but the results were driven by strong gains in its lower-margin PC-centric business. Shares fell 9 percent.  As such, the iShares PHLX Semiconductor ETF (SOXX) dropped 1.70 percent on the day but is up more than 10 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.  XHB has been on a tear in recent months after breakout above the 127.2% Fibonacci extension in early November.  The January rally pushed the ETF up against the 161.8% Fibonacci extension.  That level is significant in charting terms. The overall technical backdrop remains supportive of further advance.  So it seems to us that will break to new high as soon as it works off excessive optimism.  A close above 420 on a weekly closing basis will confirm this and trigger acceleration toward the 660 zone, or the 261.8% Fibonacci extension.

SOXX has support near 380.  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 January 19, 2021 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 moved down to test support at Wednesday’s bullish breakout point after recent test of resistance at the lower boundary of the red band was met with a wave of selling interest.  Market internal remains supportive of further advance but upside momentum does not appeared strong enough to generate widespread breakout.  Over the next few days, traders should monitor the rally and retreat behaviors as the lower boundary of the red band, currently at 3860, is tested as resistance.  A sustain advance above that level will bring 3900 into view.

For now, S&P has the lower boundary of the red band, currently at 3860, to trade against.  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.

On the downside, support is strong between 3835 and 3800.  Expect the index to draw in buyers in any pullback toward this zone.

Short-term trading range: 3825 to 3860.  S&P has support near 3825-3800.  Below it, a more significant support is around 3775.  Resistance is around 3860.  A sustain advance above that level has measured move to around 3940.

Long-term trading range: 3300 to 4300.  S&P has support near 3600.  A failure to hold above that level has measured move to 3300.  The index has resistance near 4000.  A close above that level has measured move to 4300.

In summary, there’s an orderly high-level consolidation period near the lower boundary of the red band.  The overall technical backdrop remains supportive of further advance, suggesting that S&P will breakout to new high as soon as it works off excessive optimism.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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