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Buying Into Short-term Dips Remains The Most Profitable Strategy

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 22, 2021.

We’ve noted in the previous Market Outlook that: “the S&P is in an early stage of a short-term oversold rebound.  While the lagging Money Flow measure is a little concerning but market internal remains supportive.” As anticipated, equity market stocks posted their second straight daily gain on Wednesday, with robust corporate earnings and renewed optimism about the U.S. economic recovery fueling a risk-on rally. For the day, the S&P gained 0.82 percent to 4,358.69.  The Dow Jones Industrial Average rose 0.83 percent to 34,798 and the Nasdaq Composite added 0.92 percent to 14,631.95.  The CBOE Volatility Index (VIX) widely considered the best gauge of fear in the market, fell more than 9 percent to 17.92.

Economically sensitive smallcaps, semiconductors and financials outperformed the broader market.  The iShares Semiconductor ETF (SOXX) jumped 3.07 percent on the day but is up more than 17 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 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 basing sideways using the 2020 rising trend line as support after the early 2021 rally ran out of steam just above the 161.8% Fibonacci extension.  The overall technical backdrop remains supportive of further advance suggesting that SOXX will break to new high as soon as it works off excessive optimism.  A close below 455 on a weekly closing basis will confirm this and increased the probability for a rapid advance toward the 261.8% Fibonacci extension, around 666.

SOXX has support around 430.  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 July 20, 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, the S&P climbed above the lower boundary of the pink band after recent pullback found support at the trend channel moving average.  Momentum indicator shifted higher from near oversold zone, allowing additional upside probing.  Money Flow measure trended higher from above the zero line, indicating an increase in buying pressure.  This is a positive development supporting further upside follow through and a retest of 4400.  That level roughly corresponds with the lower boundary of the red band.  As mentioned, the red zone indicated extreme overbought conditions. 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: 4245 to 4400.  S&P has support around 4340.  A failure to hold above that level has measured move to around 4245.  Resistance is around 4400.  A sustain advance above that level has measured move to 4470.

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, our near-term work on price pattern and momentum suggested that the S&P is in a midst of a short-term oversold rebound.  The overall technical backdrop remains supportive of further advance. So it’s possible that the index could continue to drift higher as trading sentiment remains strong.  As for strategy, buying into short-term dips remains the most profitable strategy.

 

Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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