Briefly:

Intraday trade: Our Tuesday's intraday trading outlook was neutral. It proved wrong, because the S&P 500 gained 1.7% following lower opening of the trading session (-1.3%). The market retraced some of its recent sell-off. For now, it looks like an upward correction. There have been no confirmed short-term positive signals so far. Therefore, we prefer to be out of the market today, avoiding low risk/reward ratio trades.

Medium-term trade: In our opinion, no medium-term positions are justified.

Our intraday outlook is neutral again. Our short-term outlook is neutral, and our medium-term outlook is neutral:

Intraday outlook (next 24 hours): neutral
Short-term outlook (next 1-2 weeks): neutral
Medium-term outlook (next 1-3 months): neutral

The main U.S. stock market indexes gained 1.7-2.3% on Tuesday, retracing some of their Monday's sell-off, as investors' sentiment improved. Stocks continued lower, but they bounced in the second half of day. The S&P 500 index has bounced off its daily low at the level of 2,593.07. It was 9.7% below the January 26 record high of 2,872.87. The Dow Jones Industrial Average gained 2.3%, and the technology Nasdaq Composite gained 2.1%.

The nearest important level of support of the S&P 500 index is now at around 2,640-2,650, marked by Monday's daily low. The next support level is at 2,600-2,620, marked by yesterday's daily low and some early December fluctuations. On the other hand, level of resistance is at 2,700, marked by previous support level. The next resistance level remains at 2,750-2,760, marked by Monday's daily high.

The index reached its record high over a week ago on Friday. It broke below month-long upward trend line on Tuesday last week following gap-down opening of the trading session, confirming reversal of the uptrend. Then it retraced all of its January rally and continued lower. It looks like some perfectly bearish scenario. Will it continue lower or bounce off after almost 10% sell-off from its late January record high? We know one thing for sure, the volatility is back and the market became less predictable in the short-term. However, we also can see that stocks are sharply reversing their medium-term upward course following the whole retracement of last month's euphoria rally:

Bounce To Continue?

The index futures contracts trade 0.3-0.5% lower vs. their Tuesday's closing prices this morning. So, investors' expectations ahead of the opening of today's trading session are negative again. But this may change before cash market opening at 9:30 a.m. The European stock market indexes have gained 0.4-1.0% so far. Will the market retrace more of its Monday's move down despite pre-session negative expectations? One thing's for sure, volatility will remain relatively high. Investors will wait for some economic data announcements: Building Permits number release at 10:00 a.m., Crude Oil Inventories at 10:30 a.m. They will also wait for more quarterly corporate earnings releases.

The S&P 500 futures contract trades within an intraday consolidation, following overnight move down. The market fluctuates after bouncing off almost 170 points from yesterday's daily low of around 2,530. So far, it looks like an upward correction. There have been no confirmed positive signals so far. We may see some more volatile fluctuations after Friday-Tuesday sell-off. The nearest important level of resistance remains at 2,700, marked by local high. On the other hand, support level is at 2,550-2,560, and the next level of support is at 2,600-2,620, marked by yesterday's intraday consolidation. The futures contract trades below 2,700 mark, as the 15-minute chart shows:

At Downward Trend Line

The technology Nasdaq 100 futures contract follows a similar path, as it trades within an intraday consolidation. The market is close to the level of 6,600 - much above recent local low of 6,260, but also well below its January 29 record high of around 7,050. Is this a short-term upward reversal or just upward correction? Time will tell. We may see some more volatility. The nearest important level of support is at around 6,550-6,570, and the next support level is at 6,480-6,500, marked by yesterday's intraday local lows. On the other hand, resistance level is at 6,670-6.700, among others. The Nasdaq futures contract trades close to its short-term downward trend line, as we can see on the 15-minute chart:

Let's take a look at Apple, Inc. stock (AAPL) daily chart (chart courtesy of http://stockcharts.com). It was one of the recent stock market rout's main drivers. The stock reached new record high around three weeks ago, following short-term consolidation along the support level of $175. The market got closer to $180 mark, but it failed to continue higher. Consequently, the stock retraced its January advance and continued lower. It accelerated its decline on Friday, as it got closer to $160. Then, on Monday it fell below that support level. Yesterday it broke its losing streak following lower opening of the trading session. We can see a positive bullish engulfing pattern. It looks like an upward reversal, and the important support level remains at around $150-155:

Amazon.com, Inc. stock (AMZN) remains amazingly strong vs. the broad stock market. Despite an overall weakness, it was extending its month-long rally up until Friday and its new record high close to $1,500 mark. The stock continues to trade well above its end of year closing price of $1,167.5. AMZN bounced back above the level of $1,400 yesterday. But will it continue towards new record highs? It depends on what the whole stock market does in the near future. If it continues retracing the sell-off, Amazon will pretty soon see new all-time highs:

The Dow Jones Industrial Average daily chart shows that blue-chip index broke below its short-term consolidation on Friday. The price sharply accelerated its downtrend on Monday, as it broke below the level of 25,500 and continued towards 24,000 mark. There were some medium-term negative technical divergences - the most common divergences are between asset’s price and some indicator based on it (for instance the index and RSI based on the index). In this case, the divergence occurs when price forms a higher high and the indicator forms a lower high. It shows us that even though price reaches new highs, the fuel for the uptrend starts running low.

The DJIA broke below its three-month-long upward trend line and retraced most of the November-January rally. Is this a new downtrend or still just correction? Yesterday's bounce was a first positive signal for the blue-chip market. We can see positive bullish piercing candlestick chart pattern. It is a pattern where the price literally pierces up through the falling market. There's one important condition: close of the day has to be above half of the body of preceding black candle:

Concluding, the S&P 500 index retraced some of its recent sell-off yesterday, as it gained 1.7% following lower opening of the trading session. The broad stock market was almost 10% below its late January record high at some point. Is this an upward reversal or just "dead cat bouncing" upward correction? For now, it looks like a correction, but bulls may be a little bit happier than yesterday.

The broad stock market retraced its whole month-long January rally, so medium-term picture is now bearish. Investors took profits off the table following the unprecedented month-long rally, but then they began selling in panic. It was quite similar to 2010 Flash Crash event. So, is this just downward correction or the beginning of a new medium-term downtrend? Friday-Tuesday's sell-off sets the negative tone for weeks or months to come.

The S&P 500 index traded around 7.5% above its December 29 yearly closing price on Friday January 26. This almost month-long rally seemed unprecedented. The legendary investor John Templeton once said that "bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria”. So, now it looks like it was an euphoria phase of the nine-year-long bull market. Did it die over this weekend? It's hard to say, but new record highs scenario seems very unlikely now.

Currently, we prefer to be out of the market, avoiding low risk/reward ratio medium-term trades. We will let you know when we think it is safe to get back in the market.

To summarize: no medium-term positions are justified from the risk/reward perspective at this moment.

Intraday trade:

No intraday position is justified from the risk/reward perspective today.

No medium-term position is justified from the risk/reward perspective at this moment.

Thank you.

Paul Rejczak
Stock Trading Strategist
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