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S&P To Test 3300 On Overbought Strength Before Significant Pullback Unfolds

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 Thursday July 30, 2020.

Stocks closed higher on Wednesday after the Federal Reserve left interest rates unchanged and Chairman Jerome Powell declared the central bank was “not even thinking about raising rates.”  The Dow Jones Industrial Average added 0.6 percent to 26,539.57. The S&P climbed 1.3 percent to 3,258.44. The Nasdaq Composite advanced 1.4 percent to 10,542.94.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell more than 5 percent to 24.

Tech held onto gains as Facebook (FB), Alphabet (GOOGL), Amazon.com (AMZN) and Apple (AAPL) provided testimony in a congressional hearing on antitrust in Big Tech.

As such, the iShares Expanded Tech-Software Sector ETF (IGV) rose 1.95 percent on the day and is up about 26 percent YTD, outperformed the S&P.  Now the question is what’s next?  Below is an update look at a trade in IGV.

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 Expanded Tech-Software Sector ETF (weekly)

Our “U.S. Market Trading Map” painted IGV bars in green (buy) – see area ‘A’ in the chart.  After dropping about 40 percent from its February high, just above 267, and met the anticipated support near the 38.2% Fibonacci retracement of the 2008-2020 major upswing, IGV had retraced all of the massive lost and some more, breaking out above the February high in early June.  Over the past few weeks, IGV has been basing sideways as it tested resistance at the 300 zone. This week’s bullish reversal signal invalidated last week’s bearish signal and opened up for a test of the 127.2% Fibonacci extension, just above 330.  A close above 300 on a weekly closing basis will confirm this.

IGV has support near 280.  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 July 29, 2020 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 rebounded nicely after recent selloff found some solid footing near the lower boundary of the pink band.  That level roughly corresponds with the important sentiment 3200 mark.  Money Flow measure trended higher from above the zero line, indicating an increase in buying pressure.  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 3300, based on the lower boundary of the red band, before a significant pullback unfolds.

For now, the bulls will continue to have the benefit of the doubts as long as the S&P holds above 3200.  A close below that level signals a medium-term correction with target around 3100.

Short-term trading range: 3200 to 3230.  S&P has minor support around 3235.  A failure to hold above that level will turn the short-term trend down and a retest of 3200 should be expected.  Resistance is at the lower boundary of the red band, just above 3300.  A breakout above that level has measured move to around 3375.

Long-term trading range: 2190 to 3600.  S&P has support near 3000.  A failure to hold above that level has measured move to 2700.  The index has resistance near 3300.  A close above that level has measured move to 3600.

In summary, Wednesday’s rally pushed the S&P closer to a formidable resistance.  While the near-term technical bias favors further short-term gains, return of overbought conditions on an intraday basis might 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 3300 before a significant pullback unfolds.

 

Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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