Briefly:

Intraday trade: Our Thursday's intraday trading outlook was bearish. It proved partly accurate because the S&P 500 index lost 0.4%, following lower opening of the trading session. The market sold off before bouncing off daily low at around 2,565. Our profit target level of 2,555 hasn't been reached. We still can see technical overbought conditions along with negative divergences. Therefore, intraday short position is favored again. Stop-loss is at the level of 2,600 and potential profit target is at 2,555 (S&P 500 index).

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

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

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

The U.S. stock market indexes lost 0.4-0.6% on Thursday, following volatile trading session, as investors took short-term profits off the table. The S&P 500 index retraced its week-long advance, as it fell below the level of 2,570, before bouncing off a support level. The Dow Jones Industrial Average lost 0.4%, after falling the lowest since late October. The technology Nasdaq Composite lost 0.6% following bounce off 6,700 mark. The nearest important level of support of the S&P 500 index is now at 2,565-2,570, marked by yesterday's local low. The next support level is at 2,545-2,560, marked by some previous local lows. On the other hand, the nearest important level of resistance is at around 2,585-2,590, marked by recent fluctuations. The next resistance level is at around 2,600, marked by Tuesday's record high of 2,597.02. The S&P 500 index fluctuates following its September-November rally. Is this a topping pattern or just pause before another leg up? There have been no confirmed negative signals so far. However, we still can see medium-term technical overbought conditions:

Negative Expectations Again

Expectations before the opening of today's trading session are negative, with index futures currently down 0.2-0.3% vs. their Thursday's closing prices. The European stock market indexes have lost 0.1-0.3% so far. Investors will wait for the Michigan Sentiment number release at 10:00 a.m. The market expects that it was at 100.8 in November. Investors will also wait for quarterly corporate earnings releases. The S&P 500 futures contract trades within an intraday downtrend following yesterday's intraday advance. The nearest important level of support is at around 2,565-2,570, marked by local lows. On the other hand, resistance level is at 2,585, among others. The futures contract trades below its recent upward trend line, as we can see on the 15-minute chart:

Nasdaq Relatively Weaker

The technology Nasdaq 100 futures contract follows a similar path, as it retraces yesterday's intraday rebound. The nearest important level of support is at around 2,540-2,560, marked by short-term local lows. On the other hand, resistance level is at 6,300-6,320, and the next level of resistance remains at around 6,350, marked by record high. The Nasdaq 100 futures contract fluctuates following yesterday's decline, as the 15-minute chart shows:

Let's take a look at Apple, Inc. stock (AAPL) daily chart (chart courtesy of http://stockcharts.com). The price reached new record high on Wednesday, as it extended its uptrend following last week's quarterly earnings release. Apple stock traded close to record high yesterday, after retracing some of its recent rally. But will the uptrend continue despite some clear technical overbought conditions? We can say that something (i.e. individual asset, entire market, technical indicator) is overbought when its value rises so high that (according to the technical analysis) it’s unlikely to advance even further. Generally, an overbought market is a sign that a downward correction is likely to occur. Traders use indicators such as Relative Strength Index (RSI), Stochastic Oscillator, Money Flow Index to identify overbought conditions. For example, one can view a given market as “overbought” if the RSI indicator for this market is above 70.

The Dow Jones Industrial Average daily chart (chart courtesy of http://stockcharts.com) shows that blue-chip index broke slightly below its two-month-long upward trend line yesterday. Is this a downward reversal or just quick downward correction? We still can see some short-term negative technical divergences:

Concluding, the S&P 500 index retraced most of its recent move up yesterday, before bouncing off support level. It remains relatively close to its Tuesday's new record high. Is this a downward reversal or just consolidation within medium-term uptrend? There have been no confirmed negative signals so far. However, we still can see medium-term overbought conditions along with negative technical divergences. Will they lead to a downward correction?

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:

S&P 500 index - short position: profit target level: 2,555; stop-loss level: 2,600,
S&P 500 futures contract (September) - short position: profit target level: 2,552; stop-loss level: 2,597
SPY ETF (SPDR S&P 500, not leveraged) - short position: profit target level: $255.5; stop-loss level: $260.0

Medium-term trade:

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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