Briefly:
Intraday trade: Our Friday's intraday trading outlook was bearish. The market opened virtually flat, then it was extending its short-term uptrend. However, the index reversed its upward course and retraced the whole intraday advance. It didn't reach our stop-loss level of 2,770. We still can see short-term overbought conditions along with negative technical divergences. Therefore, intraday short position is favored again. Stop-loss is at the level of 2,760 and potential profit target is at 2,660 (S&P 500 index).
Medium-term trade: In our opinion, no medium-term positions are justified.
Our intraday outlook is bearish. 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 were mixed between -0.2% and +0.1% on Friday, as investors hesitated following week-long rebound off previous Friday lows. The S&P 500 index retraced more than 61.8% of its late January - early February sell-off, as it reached local high above the level of 2,750. However, it closed virtually flat after retracing its earlier gains. It currently trades 4.9% below January 26 record high of 2,872.87. The Dow Jones Industrial Average gained 0.1%, and the technology Nasdaq Composite lost 0.2% on Friday.
The nearest important level of resistance of the S&P 500 index remains at around 2,740, marked by 61.8% retracement of the whole move down off late January record high (2,742.92). The next level of resistance is at around 2,750-2,755, marked by local high. The resistance level is also at 2,760-2,765. On the other hand, support level is at 2,700, and the next level of support is at 2,650, among others.
The index reached its record high more three weeks ago on Friday, January 26. It broke below month-long upward trend line, as it confirmed uptrend's reversal. Then the broad stock market gauge retraced all of its January rally and continued lower. The index extended its downtrend a week ago on Friday, as it was almost 12% below the late January record high. We can see that stocks reversed their medium-term upward course following whole retracement of last month's euphoria rally. However, the market bounced off its almost year-long medium-term upward trend line last Friday, and it retraced more than 61.8% of the sell-off within a few days of trading. Is this still just an upward correction or uptrend leading to new all-time highs? For now, it still looks like an upward correction, but bulls are happier than a week ago:
Negative Expectations, Just Downward Correction?
The index futures contracts are trading 0.4-0.7% lower vs. their Friday's closing prices right now. It means that investors' expectations ahead of the opening of today's trading session are negative following long holiday weekend. The European stock market indexes have been mixed so far. Will the sentiment remain bearish after cash market opening at 9:30 a.m.? For now, it looks like the market may retrace some more of its recent run-up. There will be no new important economic data announcements today. Investors will wait for some quarterly corporate earnings releases.
The S&P 500 futures contract trades within an intraday downtrend, as it retraces some of its last week's move up. It has bounced off resistance level at around 2,750 on Friday. The nearest important level of support is at around 2,690-2,700, marked by previous short-term consolidation. The next support level is at 2,650, among others. On the other hand, resistance level is at 2,730-2,735, marked by short-term fluctuations. The futures contract trades below its short-term downward trend line, as we can see on the 15-minute chart:
Nasdaq Also Lower
The technology Nasdaq 100 futures contract follows a similar path, as it trades within an intraday downtrend. The market is retracing some of its recent rally following bouncing off resistance level at around 6,850. It broke above the level of 6,800 after rebounding off Wednesday's local low below the level of 6,500. So, volatility remains relatively high after the early February sell-off followed by week-long rebound. The nearest important level of support is now at 6,670-6,700, marked by recent fluctuations. On the other hand, resistance level is at 6,770-6,800, among others. The Nasdaq futures contract trades close to its Thursday's intraday consolidation, as the 15-minute chart shows:
Apple And Amazon - Potential Short-Term Topping Patterns
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. Then it led last week's broad stock market rebound rally. The stock failed to continue higher a month ago and consequently, it retraced its January advance and continued much lower. It fell close to support level of $150 on previous Friday. Since then, it traded within a relatively strong uptrend. However, it failed to break above the resistance level of $175-180 on Friday. The market reached its previously broken upward trend line. It looks like some short-term topping pattern:
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 February 2 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 a week ago, 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. We can see some uncertainty just below the early month record high - a potential double top pattern?
The Dow Jones Industrial Average daily chart shows that blue-chip index broke below its short-term consolidation three weeks ago. The price sharply accelerated its downtrend, 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 fell below 23,500 on Friday a week ago. We saw positive candlestick chart pattern on Friday. The market formed bullish harami. 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. Since then, it continued higher. The market bounced off resistance level at around 25,500 on Friday. Some short-term downward correction seems likely at this point:
Concluding, the S&P 500 index continued its short-term uptrend on Friday, however, it closed virtually flat after retracing the whole intraday move up. The broad stock market is trading around 5% below its late January record high of 2,872.87. Was last week's action a new uptrend or just strong upward correction following 12% sell-off from record high? We may see some uncertainty in the near future. Stocks are expected to open lower following long holiday weekend, but will they extend this move down? The market will probably retrace some more of its week-long rally.
The broad stock market was falling almost 12% off its late January record high on Friday, February 9 before an intraday reversal. It was a final panic selling ahead of short-term upward reversal, and the market found a support at around its medium-term upward trend line, which was at 2,550. The index extended its week-long rebound on Friday, but it failed to continue above 61.8% retracement of the sell-off. It doesn't look like an upward correction is over, but the market may retrace some of its recent run-up.
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 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:
S&P 500 index - short position: profit target level: 2,660; stop-loss level: 2,760,
S&P 500 futures contract (September) - short position: profit target level: 2,660; stop-loss level: 2,760
SPY ETF (SPDR S&P 500, not leveraged) - short position: profit target level: $265.6; stop-loss level: $275.6
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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