S&P Upside To Be Limited By Overbought Conditions

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 Monday April 26, 2021.

Equity market closed higher Friday, led by financials and tech stocks ahead of the busiest week of corporate earnings that could set market direction for weeks to come.  The Dow Jones Industrial Average gained 0.7 percent to 34,043.49. The S&P rose 1.1 percent to 4,180.17 while the tech-heavy Nasdaq Composite climbed 1.4 percent to 14,016.81.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, tumbled more than 8 percent to 17.33.

In technology, big tech recovered losses from a day earlier as investors took advantage of the recent selloff ahead of the busiest earnings week.  Intel (INTC) fell more than 5 percent after it beat first-quarter estimates and raised its guidance, but the sharp pace of recovery in its stock price ahead of the report was perhaps too much too soon, according to some on Wall Street.  As such, the iShares PHLX Semiconductor ETF (SOXX) rose 1.82 percent on the day and is up more than 14 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 March rally ran out of steam just above the prior high set in February.  The overall technical backdrop remains positive, suggesting that SOXX will take a new leg higher as soon as it works off excessive optimism.  A close above 450 on a weekly closing basis will confirm this and trigger acceleration toward the 660 zone or the 261.8% Fibonacci extension.

SOXX has support around 410.  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 bullish (buy).  Last changed April 23, 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”]

Once again, S&P moved up to test resistance at lower boundary of the red band after recent pullback found support near 4100.  Money Flow measure flashed a weak bearish signal.  The indicator printed a lower high as prices breakout to new high in early April, suggesting that the bears are more aggressive as prices dropped than the bulls were as prices ascended. Market is short-term overbought, following recent rally. This will give the bulls more pressure than they have already had.

For now, 4100 is the line in the sand.  A failure to hold above it indicated that long-term buying pressure has been exhausted and a much deeper pullback should be expected and we’re looking at 3460, based on the trend channel moving average.

On the upside, S&P has the lower boundary of the red band, around the important sentiment 4200 mark, 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.

Short-term trading range: 4100 to 4200.  S&P has support around 4160.  A failure to hold above that level has measured move to around 4100.  Resistance is around 4200.  A sustain advance above that level has measured move to 4290.

Long-term trading range: 3550 to 4500.  S&P has support near 3900.  A failure to hold above that level has measured move to 3550.  The index has resistance near 4200.  A close above that level has measured move to 4500.

In summary, the fact that the S&P is overbought as it approached key price level that had been successful in repelling price action in the past suggested that upside gains could be limited.  As for strategy, traders should consider buying into market dips rather than chasing breakouts.

 

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.