S&P To Attract Buyers In Any Pullback Toward 3700

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Thursday January 28, 2021.

Stocks fell Wednesday, shrugging off the Federal Reserve’s accommodative remarks on monetary policy as investors digested mostly downbeat corporate earnings.  The Federal Open Market Committee kept its benchmark rate in a range of 0% to 0.25% and maintained its $120 billion monthly pace of bond purchases.  The Dow Jones Industrial Average fell 2.1 percent to 30,303.17. The S&P dropped 2.6 percent to 3,750.77.  The tech-heavy Nasdaq Composite slid 2.6 percent to 13,270.60.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, soared more than 60 percent to 37.21.

Chipmakers were under pressure, down more than 2 percent, paced by weakness in Advanced Micro Devices (AMD) despite posting better-than-expected earnings of 52 cents per share.  As such, the iShares PHLX Semiconductor ETF (SOXX) fell 5.19 percent on the day but is up about 3 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 red (sell) – see area ‘A’ in the chart.  SOXX has been on a tear in recent days after breaking out above the closely watch 330 zone, or the 127.2% Fibonacci extension, in early November.  The rally pushed the ETF up against the 161.8% Fibonacci extension. This week’s massive reversal bar suggested that the resistance would hold, at least for the time being.  Over the next few days, traders should monitor trading behavior as the 384 zone, or the 2020 rising trend line, is tested as support.  A failure to hold above that level will confirm this week’s bearish reversal signal and a retest of the 330 should be expected.

SOXX has resistance just above 420.  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 January 27, 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”]

Key technical development in Wednesday session was a clear break below the lower boundary of the pink band, the level that offered support since the index broke out in early November.  Momentum indicator trended lower from near overbought zone, suggesting further short-term weakness likely.  Money Flow measure is on a verge of turning negative following Wednesday’s selloff.  These elements suggested that the index might have to go to a lower level to attract new buyers.  Expect the index to draw in buyers in any pullback toward the trend channel moving average, around 3700.

Short-term trading range: 3700 to 3600.  S&P has support around 3700.  A failure to hold above that level has measured move to around 3560.  Resistance is around 3800.  A sustain advance above that level has measured move to 3870.

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, 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 3700 zone.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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