Briefly:

Intraday trade: Our Monday's intraday trading outlook was bearish. It proved accurate, because the S&P 500 lost 0.7% following slightly lower opening of the trading session (-0.2%). The market retraced its Friday's advance. However, it didn't reach our intraday profit target level of 2,835 (daily low of the S&P 500 index fell at 2,851.48). There have been no confirmed negative signals so far, but we still can see some clear short-term overbought conditions along with an overly bullish investors' sentiment. Therefore, intraday short position is favored again. Stop-loss is at the level of 2,870 and potential profit target is at 2,820 (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 main U.S. stock market indexes lost 0.5-0.7% on Monday, retracing most of their Friday's rally, as investors took short-term profits off the table. The S&P 500 index got closer to 2,850 mark again, as it fell 0.7% vs. Friday's closing price. The Dow Jones Industrial Average broke below the level of 26,500 again (-0.7%), and the technology Nasdaq Composite lost 0.5%, as it was relatively stronger than the broad stock market yesterday.

The nearest important level of support of the S&P 500 index remains at around 2,850-2,855, marked by Wednesday's local high, among others. The next support level is at 2,825-2,830, marked by previous local lows. The support level is also at 2,800-2,810. The support level is the price level, at which the buying interest is strong enough to overcome selling pressure and push the price higher. Support usually refers to the previous low or lows, lines that are created by drawing the line between previous important bottoms or important tops and then extrapolating this line into the future. We still can see medium-term technical overbought conditions. The index closed along its month-long upward trend line yesterday, but it may break below that support level today:

Negative Expectations Again

Expectations before the opening of today's trading session are negative, because index futures trade 0.5-0.6% lower vs. yesterday's closing prices. The European stock market indexes have lost 0.5-0.7% so far. Investors will wait for the Consumer Confidence number release at 10:00 a.m. The market expects that it was at 123.2 in January.

The S&P 500 futures contract trades within an intraday consolidation, as it fluctuates following its overnight move down. The market has extended its yesterday's sell-off after breaking below support level of 2,850. Therefore, the nearest important level of resistance is at around 2,850, marked by that previous support level. The next resistance level remains at 2,870-2,880, marked by record high. On the other hand, support level is at around 2,830. The next level of support is at 2,800-2,810, marked by previous consolidation. The futures contract extends its yesterday's move down, as the 15-minute chart shows:

Nasdaq Also Lower

The technology Nasdaq 100 futures contract follows a similar path, as it trades within an intraday consolidation after extending its move down overnight. The nearest important level of support is at around 6,920-6,950, marked by short-term local low. The next level of support is at 6,880-6,900, among others. On the other hand, level of resistance is at 6,980-7000, and the next one is at 7,040-7,050, marked by record high. The Nasdaq 100 futures contract continues to trade above its few-session-long upward 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 remains relatively weak vs. the broad stock market. It is worth mentioning because Apple's market capitalization is close to $900 billion, which is almost two times more than the value of all the cryptocurrencies combined. The stock reached new record high two 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 the whole January advance. It broke below its late December low yesterday. The stock trades within a potential support level of $165-170. Will it bounce ahead of February 1 quarterly earnings release?

On the other hand, Amazon.com, Inc. stock (AMZN) remains relatively strong vs. the broad stock market. It continued its month rally yesterday, after breaking above $1400 mark on Friday. Amazon is expected to release its quarterly earnings on Thursday (February 1). However, we will likely see some "buy rumors, sell news" profit taking action:

The Dow Jones Industrial Average daily chart shows that blue-chip index reached new record high on Friday, as it further extended its short-term uptrend following breakout above 26,000 mark. However, it retraced its Friday's move up yesterday. For now, it looks like a short-term downward correction, but we still can see 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:

Concluding, the S&P 500 index lost 0.7% on Monday, as it retraced most of its Friday's advance. The broad stock market got closer to its last week's consolidation again. It may act as a support level for some time.

The S&P 500 index traded around 7.5% above its December 29 yearly closing price on Friday. This almost month-long rally seems 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, is this an euphoria phase of the nine-year-long bull market? It's hard to say, but some major downside risks are growing.

There have been no confirmed negative signals so far, but we still can see medium-term overbought conditions. We can 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. Paying attention to the overbought/oversold status of the market is very useful, but there are many other factors that need to be considered before placing a trade.

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: 2,820; stop-loss level: 2,870,
S&P 500 futures contract (September) - short position: profit target level: 2,818; stop-loss level: 2,867
SPY ETF (SPDR S&P 500, not leveraged) - short position: profit target level: $281.3; stop-loss level: $286.3

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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