S&P Could Test 4000 On Overbought Strength Before Significant Pullback Unfolds

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Thursday April 1, 2021.

Stocks closed mix Wednesday with the S&P and Nasdaq rose, boosted by gains in technology shares, and the three major Wall Street indexes registered their fourth straight quarterly rise as investors positioned themselves for President Joe Biden’s massive infrastructure plan.  For the day, the bench mark gauge rose 0.36 percent to close at 3,972.89.  The Nasdaq Composite was up 1.5 percent while the Dow Jones Industrial Average fell 0.26 percent.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell more than 1 percent to 19.40.

Chip stocks climbed nearly 3 percent led by a jump in Applied Materials (AMAT) as Bernstein talked up the growth prospects for the sector.  Bernstein initiated coverage on Applied Materials at outperform, betting that growth trends in the underlying semi market likely to remain positive over the long term.  As such, the iShares PHLX Semiconductor ETF (SOXX) jumped 2.44 percent on the day and is up about 12 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.  This week’s upside follow-through confirmed last week’s bullish reversal signal.  The overall technical backdrop remains positive, suggesting that the ETF will take a new leg higher as soon as it works off excessive optimism.  Right now, the most important thing to watch is trading behaviors as the February high, around 444, is tested as resistance.  A close above that level signifies a bullish breakout and trigger acceleration toward the 261.8% Fibonacci extension, around 666.

SOXX has support near 397.  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 March 26, 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”]

As expected, S&P moved up to test resistance at the lower boundary of the red band after recent pullback found support near the trend channel moving average.  Money Flow measure climbed above the zero line, indicating a positive net demand for stocks.  Momentum has been strengthened but the return of overbought conditions on an intraday basis will put a cap on the upside.  With this in mind, we’d look to reduce exposure into overbought strength, which might take the S&P closer to 4000 before a significant pullback unfolds.

For now, 3900 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 that level.

Short-term trading range: 3900 to 3950.  S&P has support around 3950.  A failure to hold above that level has measured move to around 3900.  Resistance is around 4000.  A sustain advance above that level has measured move to 4100.

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, S&P inches toward new highs Wednesday, signified resumption of the multi-month upswing.  Overbought conditions have returned on an intraday 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.  With this in mind, we’d look to reduce exposure into overbought strength, which might take the S&P closer to 4000 before a significant pullback unfolds.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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