Briefly:

Intraday trade: Our Thursday's intraday trading outlook was neutral. The market lost almost 4%, as it retraced its recent rebound off Tuesday's daily lows. Yesterday's sell-off came very unexpected, so being out of the market wasn't bad idea after all. Will downtrend continue? There have been no confirmed short-term positive signals so far. 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 lost 3.8-4.2% on Thursday, retracing their Tuesday-Wednesday's rebound, as investors sentiment worsened again. The S&P 500 index fell the lowest since the half of November. It currently trades 10.2% below its January 26 record high of 2,872.87. The Dow Jones Industrial Average lost 4.2% yesterday, and the technology Nasdaq Composite lost 3.9%.

The nearest important level of support of the S&P 500 index is now at around 2,540-2,560, marked by November local lows. The next support level is at 2,500, among others. On the other hand, the nearest important level of resistance is at 2,600, and the next resistance level is at 2,680-2,700, marked by recent fluctuations.

The index reached its record high two weeks ago on Friday, January 26. It broke below month-long upward trend line on Tuesday last week following gap-down opening of the trading session. Uptrend's reversal has been confirmed. Then the market retraced all of its January rally and continued lower. Tuesday's bounce stopped the decline, but the index resumed its downtrend yesterday. We can see that stocks are sharply reversing their medium-term upward course following the whole retracement of last month's euphoria rally:

Uncertainty Following Another Sell-Off

The index futures contracts trade between -0.2% and +0.3% vs. yesterday's closing prices this morning. So, investors' expectations ahead of the opening of today's trading session are mixed following yesterday's 4% sell-off. The European stock market indexes have lost 0.9-1.3% so far. Will the sentiment change before cash market opening at 9:30 a.m.? For now, it looks like the market may fluctuate along the level of 2,600. One thing's for sure, volatility will remain relatively high. Investors will wait for the Wholesale Inventories number release at 10:00 a.m. Investors will also wait for more quarterly corporate earnings releases.

The S&P 500 futures contract trades within an intraday consolidation, following overnight bounce. The market retraces some of its yesterday's session last hour sell-off. It trades less than 1% above its short-term local low of around 2,577. The nearest important level of support is at around 2,580-2,600. On the other hand, resistance level is at 2,650, marked by yesterday's intraday consolidation. The futures contract trades below its short-term downward trend line, as we can see on the 15-minute chart:

Nasdaq Close To Tuesday's Low

The technology Nasdaq 100 futures contract follows a similar path, as it retraces some of its yesterday's sell-off this morning. However, it remains around 4% below its yesterday's pre-session local highs. It shows how volatile the market is right now. The nearest important level of support is at 6,280-6,300, marked by local lows. On the other hand, resistance level is at 6,400, and the next level of resistance remains at 6,500, among others. The Nasdaq futures contract trades close to its Tuesday's low, 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, but failed to reverse the downtrend. It fell closer to Tuesday's low yesterday. Potential support level is at around $150-155, and resistance level remains at $163:

Amazon.com, Inc. stock (AMZN) remained relatively strong vs. the broad stock market recently. Despite an overall weakness, it was extending its month-long rally up until Friday last week and its new record high close at around $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 on Tuesday. However, it failed to continue towards new record highs. For now, it looks like some medium-term topping pattern:

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:

Concluding, the S&P 500 index lost 3.8% on Thursday, as investors' sentiment considerably worsened following failed attempt at breaking out above the resistance level of 2,700-2,750. The broad stock market is more than 10% below its late January record high. So, Tuesday-Wednesday's rally was just "dead cat bouncing" upward correction. Which direction is next? Probably lower, but the market may find some short-term support at around its medium-term upward trend line, which is currently at 2,550.

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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