S&P In Short-term Reflexive Bounce

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Friday June 18, 2021.

We’ve noted in the previous Market Outlook that: “S&P shifted to short-term overbought consolidation phase.  4200 is the line in the sand.  The longer the index stays near that level, the more vulnerable it is to lower prices.  This is the real danger in the current market.”  As anticipated, S&P ended flat Thursday as tech was lifted by falling bond yields but gains for the broader market were kept in check by falling cyclical stocks following the Federal Reserve’s hawkish turn a day earlier.  For the day, the bench mark gauge fell 0.06 percent, the Dow Jones Industrial Average was down 0.62 percent and the Nasdaq Composite was up 0.87 percent.  The CBOE Volatility Index (VIX) widely considered the best gauge of fear in the market, fell less than 1 percent to 17.75.

Semiconductor stocks attracted strong buying support amid strength in Nvidia (NVDA) and Advanced Micro Devices (AMD).  As such, the iShares PHLX Semiconductor ETF (SOXX) rose 1.08 percent on the day and is up about 16 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 April correction found support near the lower limit of the 2021 sideways trading range. This week’s rally pushed SOXX toward the 450 zone, or the upper limit of its 2021 sideways trading range.  The overall technical backdrop remains positive suggesting that the resistance might not hold for long. A close above 450 on a weekly closing basis will bring 660 zone or the 261.8% Fibonacci extension into view.

SOXX has support around 388.  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 June 16, 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”]

S&P moved up to test resistance at the lower boundary of the pink band after recent pullback found support near the trend channel moving average.   That level was significant when the index climbed about it in late May and fell below it on Wednesday. This history indicated an important role in terms of resistance.  Market internal has been deteriorated following recent setback but downside momentum does not appeared strong enough to generate widespread breakouts.

Over the next few days, it’d be important to monitor the rally and retreat behavior as the 4235 zone is tested.  Some aggressive traders might use this level like a magnet to sell. With that said, if the market is going to find bottom in the near term, we want to see the S&P establishes some trading ranges and climbs above 4235.  Staying below that level heralds more losses.

For now, the trend channel moving average, just below 4200, is the line in the sand. That level was significant when the index climbed above it in late 2020.  When strong support is broken it means that near-term buying pressure has finally been exhausted.  With that said, a close below 4180 is outright bearish and a much deeper pullback should be expected and we’re looking at 4050.

Short-term trading range: 4180 to 4265.  S&P has support around 4215.  A failure to hold above that level has measured move to around 4180.  Resistance is around 4235.  A sustain advance above that level has measured move to 4265.

Long-term trading range: 4100 to 4400.  S&P has support near 4100.  A failure to hold above that level has measured move to 3750.  The index has resistance near 4400.  A close above that level has measured move to 4750.

In summary, S&P rebounded nicely after recent pullback found support near the trend channel moving average.  Our near-term work on price structure and momentum suggested that the index is in a short-term reflexive bounce.  Nevertheless, traders will be looking for the index to close above 4265 before getting aggressively long again.


Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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