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S&P’s 3400 Continues To Act As Price Magnet

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 August 13, 2020.

We’ve noted in the previous Market Outlook that: “an overbought pullback consolidation interrupted the late July impressive rally in the S&P.  Although seemingly vulnerable to further short-term weakness, the overall technical backdrop remains positive so sell-off should be shallow and quick because the sideline money will try to fight its way back into the market.”  As anticipated, S&P regained all of the prior session lost and closed just below a record high Wednesday, rose 1.4 percent to close at 3,380.35.  The Dow Jones Industrial Average jumped 1.1 percent to 27,976.84. The Nasdaq Composite outperformed, rallying 2.1 percent to 11,012.24.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell more than 7 percent to 22.23.

The move higher in the broader market was sparked by a rally in the Fab 5 and chip stocks.  Apple (AAPL), Amazon.com (AMZN), Microsoft (MSFT), Facebook (FB) and Alphabet (GOOGL) the so-called Fab 5, which make up about 25 percent of S&P, were up more than 1 percent a piece.  Advanced Micro Devices (AMD) jumped 7.4 percent, while NVIDIA (NVDA) added 5.4 percent and Qualcomm (QCOM) rose 6.4 percent.  As such, the iShares PHLX Semiconductor ETF (SOXX) rose 3.23 percent on the day and is up more than 20 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 SOX bars in green (buy) – see area ‘A’ in the chart.  SOXX has been on a tear in recent weeks after breaking out above the prior high set in February 2020 in early July.  This week’s upside follow-through confirmed the bullish signal and increased the probability of a rapid advance toward the next level of resistance at the 127.2% Fibonacci extension, just below 340.

SOXX has support just below 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 remains 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”]

The big picture remains the same. The S&P continues drifting higher after breaking out above the June recovery high in late July.  This is a positive development but let’s notice that with Wednesday’s gains, the index is traded above the lower boundary of the red band, or extreme overbought zone.  Technically speaking, 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.

Money Flow measure is above the zero line, indicating a positive net demand for stocks.  This certainly would argue that the near-term risk remains to the upside.   With that said while more backing and filling would not be a surprise, if the S&P could hold above 3350 then a move above 3400 would be easier to be achieved.

Short-term trading range: 3300 to 3400.  S&P has support around 3350.  A failure to hold above that level has measured move to around 3320-3280.  Resistance is around 3380.  A breakout above that level has measured move to around 3400-3430.

Long-term trading range: 3100 to 3600.  S&P has support near 3100.  A failure to hold above that level has measured move to 2700.  The index has resistance near 3450.  A close above that level has measured move to 3600.

In summary, although overbought condition is keeping buyers at bay, S&P’s 3400 continues to act as price magnet.  Short-term traders can anticipate increase short-term volatility with rapid up and down moves in the market.

 

Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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