Briefly:
Intraday trade: Our Monday's intraday trading outlook was neutral. The market gained 1.4%, as it retraced more of its last week's Thursday's sell-off. Will this short-term move up continue? The index is expected to open lower today, so it may extend its short-term fluctuations. 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. 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 1.4-1.7% on Monday, as investors' sentiment further improved following Friday's rebound off new short-term lows. The S&P 500 index fell the lowest since the early October on Friday. It traded 11.8% below its January 26 record high of 2,872.87 (-340.2 points). The broad stock market gauge has retraced some more of its recent sell-off yesterday, as it gained 1.4%. The Dow Jones Industrial Average gained 1.7%, and the technology Nasdaq Composite gained 1.6%.
The nearest important level of resistance of the S&P 500 index is at 2,680-2,700, marked by local highs. The next resistance level is at around 2,730, marked by last week's Wednesday' local high. On the other hand, support level is at 2,640-2,650, marked by previous level of resistance. The next support level is at 2,580-2,600, marked by recent local lows. The level of support is also at 2,530-2,550, marked by Friday's daily low.
The index reached its record high two weeks ago on Friday, January 26. It broke below month-long upward trend line on Tuesday, January 30 following gap-down opening of the trading session, confirming uptrend's reversal. Then the market retraced all of its January rally and continued lower. The index extended its downtrend on Friday, as it fell almost 12% below its late January record high. We can see that stocks are sharply reversing their medium-term upward course following the whole retracement of last month's euphoria rally. However, the market bounced off its medium-term upward trend line on Friday, as the daily chart shows:
Negative Expectations After Friday-Monday Bounce
The index futures contracts are losing 0.6-0.7% vs. their yesterday's closing prices this morning. So, investors' expectations ahead of the opening of today's trading session are negative following two-day-long rally off Friday's local lows. The European stock market indexes have been mixed so far. Will the sentiment change before cash market opening at 9:30 a.m.? For now, it looks like the market may extend its short-term fluctuations. It will probably retrace some of its Friday-Monday's move up. One thing's for sure, volatility will remain relatively high. There will be no new important economic announcements today. However, investors will wait for more quarterly corporate earnings releases.
The S&P 500 futures contract trades within an intraday consolidation, following overnight move down. Investors take some short-term profits off the table following a rebound off Friday's new short-term low of around 2,530. The market retraced some more of its Thursday's sell-off yesterday. It trades slightly below the level of 2,650. The nearest important level of support is at 2,630, marked by local lows. The next support level is at 2,580-2,600. On the other hand, resistance level is at around 2,650-2,670, and the next level of resistance is at 2,690-2,700. The futures contract continues to trade along the level of 2,650, as we can see on the 15-minute chart:
Technology Sector Also Lower
The technology Nasdaq 100 futures contract follows a similar path, as it fluctuates after its two-day-long rally off Friday's low. The market has bounced more than 350 points off its Friday's intraday low below the level of 6,200. It shows how volatile are technology stocks right now. The nearest important level of resistance is at around 6,500-6,550, and the next resistance level remains at 6,600-6,620, marked by short-term local highs. On the other hand, support level is at 6,430-6,450, and the next level of support is at 6,400, among others. The Nasdaq futures contract extends its fluctuations following yesterday's breakout above short-term downward trend line, as the 15-minute chart shows:
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 broke its losing streak on Tuesday last week, but failed to reverse the downtrend. It fell close to support level of $150 on Friday. Then, it bounced and closed positive. The stock continued higher yesterday. Is this an upward reversal? For now, it looks like some short-term consolidation. The nearest important level of resistance is at around $165-170, and support level remains at $150-155:
Amazon.com, Inc. stock (AMZN) was relatively strong vs. the broad stock market recently. Despite an overall weakness, it was extending its month-long rally up until Friday over a week ago and its new record high at around $1,500 mark. The stock continues to trade well above its end of year closing price of $1,167.5. AMZN bounced off its upward trend line on Friday, following downward correction below the price of $1300. Will it continue towards new record highs? Depends on what the whole stock market does in the near future, but this stock continues to act pretty bullish:
The Dow Jones Industrial Average daily chart shows that blue-chip index broke below its short-term consolidation a week ago 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? Tuesday's bounce was a first positive signal for the blue-chip market. We saw positive bullish piercing candlestick chart pattern. It is a pattern where the price literally pierces up through the falling market. However, the index struggled at the nearest important resistance level of 25,000, and reversed its short-term move up. Consequently, it fell below 24,000 mark again, and continued below 23,500 on Friday. We can see a positive candlestick chart pattern again. The market formed a bullish harami on Friday. It is a pattern in which a large black candlestick is followed by a smaller white candlestick with body located within the body of a preceding day:
Concluding, the S&P 500 index extended its Friday's bounce off new short-term low, as it gained 1.4% yesterday. The broad stock market was retracing almost 12% off its late January record high on Friday, before an intraday reversal. Was this some final panic selling ahead of major upward reversal? Tuesday-Wednesday's rally was just "dead cat bouncing" upward correction. On Friday, we wrote that the market may find some short-term support at around its medium-term upward trend line, which was at 2,550. It came true, as the index bounced off support along the level of 2,530-2,550. In the near future, we will probably see some short-term uncertainty. The market may continue to fluctuate following recent sell-off.
The broad stock market retraced its whole month-long January rally and continued lower, the lowest since early October. 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. Is this just downward correction or the beginning of a new medium-term downtrend? This sell-off set 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 a week ago? 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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