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S&P Constrained by Short-term Sideways Trend

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 Friday February 12, 2021.

We’ve noted in the previous Market Outlook that: “the big picture remains the same.  There’s an orderly high-level consolidation period near S&P’s 3900, which represented the digestion period in the aftermath of the late January rally.  Market internals remains positive and downside momentum does not appear strong enough to generate widespread breakouts.  As for strategy, buying into short-term dips remains the most profitable strategy.”  As anticipated, S&P eked out modest gains on Thursday, up 0.2 percent to 3,916.38, with investors betting on more fiscal stimulus, but U.S. President Joe Biden said China was poised to “eat our lunch,” a warning that tempered enthusiasm for a market near record highs.  The Nasdaq Composite added 0.4 percent to 14,025.77.  The Dow Jones Industrial Average closed near the unchanged mark at 31,430.70.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell more than 3 percent to 21.25.

Nvidia (NVDA) Corp rose 3.2 percent and Intel Corp (INTC) gained 3.1 percent, making technology the leading sector to gain on the S&P and Nasdaq.  As such, the iShares PHLX Semiconductor ETF (SOXX) jumped 3.46 percent on the day and is up about 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 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 basing sideways near the 161.8% Fibonacci extension as it works off overbought conditions.  This week’s rally pushed the ETF above the closely watch 420 zone, or the 161.8% Fibonacci extension, signify a bullish breakout and upside reversal.  The overall technical backdrop remains supportive of further advance.  So it seems to us that this rally could carry SOXX up the next level of resistance near 660, or the 261.8% Fibonacci extension.

SOXX has support near 395.  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 February 2, 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”]

S&P continues basing sideways using the 3900 zone as support.  That level roughly corresponds with the lower boundary of the red band, or extreme overbought zone.  As mentioned, 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.  While seemingly vulnerable to some short-term setback the overall technical backdrop remains positive so pullback should be short-lived.

For now, 3900 is the line in the sand. Unless there is a close below that level, the path with least resistance is to the upside.

Short-term trading range: 3900 to 3970.  S&P has support around 3900.  A failure to hold above that level has measured move to around 3850.  Resistance is around 3980.  A sustain advance above that level has measured move to 4020.

Long-term trading range: 3300 to 4300.  S&P has support near 3600.  A failure to hold above that level has measured move to 3300.  The index has resistance near 4000.  A close above that level has measured move to 4300.

In summary, trading behavior in the S&P constrained by a short-term sideways pattern and shown little evidence of a sustainable change in trend.  While seemingly vulnerable to some short-term setback the overall technical backdrop remains positive so pullback should be short-lived.

 

Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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