The main U.S. stock market indexes lost 0.2-0.3% on Wednesday's following relatively brief rally after the FOMC's Rate Decision release. The S&P 500 index continued to fluctuate within its short-term consolidation. It is currently around 5.2% below January 26 record high of 2,872.87. The Dow Jones Industrial Average lost 0.2%, and the technology Nasdaq Composite lost 0.3%.
The nearest important level of resistance of the S&P 500 index remains at 2,740-2,750, marked by Monday's daily gap down of 2,741.38-2,749.97. Yesterday's daily high of 2,739.14 confirmed the importance of that resistance level. The next resistance level is at around 2,775-2,780, marked by last Wednesday's daily high. On the other hand, support level is at 2,695-2,700, marked by Monday's daily low, among others. Potential support level is also at 2,650-2,670, marked by previous local lows.
We can see that stocks reversed their medium-term upward course following whole retracement of January euphoria rally. Then the market bounced off its almost year-long medium-term upward trend line, and it retraced more than 61.8% of the sell-off within a few days of trading. Is this just an upward correction or uptrend leading to new all-time highs? The market is still in the middle of two possible future scenarios. The bearish case leads us to February low or lower after breaking below medium-term upward trend line, and the bullish one means potential double top pattern or breakout above the late January high. Monday's sell-off made the bearish case more likely again. You should take notice of a breakdown below potential rising wedge pattern. This over month-long trading range looks like an upward correction following late January - early February sell-off:
Stocks Set to Open Much Lower
Expectations before the opening of today's trading session are negative, because the index futures contracts trade 0.8-1.3% lower vs. their yesterday's closing prices. The European stock market indexes have lost 0.7-1.0% so far. Investors will wait for some economic data releases: Initial Claims at 8:30 a.m., Flash Manufacturing PMI, Flash Services PMI numbers at 9:45 a.m., Leading Indicators at 10:00 a.m. The market is back at its Monday's lows, so the overall sentiment worsened again. Will it break lower? If the S&P 500 index breaks below the support level of 2,700, it could continue towards the above-mentioned 2,650-2,670.
The S&P 500 futures contract trades within an intraday downtrend, as it extends its yesterday's intraday move down. The nearest important level of support is at around 2,695-2,700, marked by Monday's local low. The next support level is at 2,680, among others. On the other hand, resistance level is at around 2,710-2,715, marked by recent fluctuations. The resistance level is also at 2,725-2,730. The futures contract trades below its short-term downward trend line, as we can see on the 15-minute chart:
Nasdaq Breaks Below 6,800
The technology Nasdaq 100 futures contract follows a similar path, as it trades within an intraday downtrend. It broke below 6,800 mark this morning. The market gained more than 1,000 points off its February 9 bottom, as it remarkably retraced all of its late January - early February sell-off in one month. Is this just downward correction following record-breaking rally? It still looks like a correction and not some new medium-term downtrend. The nearest important short-term resistance level is at around 6,850, marked by recent local lows and the next level of resistance remains at 6,900-6,950. On the other hand, potential support level is at 6,700-6,750. The Nasdaq futures contract extends its short-term downtrend this morning, as the 15-minute chart shows:
Apple Leads Lower, Facebook Bounces
Let's take a look at Apple, Inc. stock (AAPL) daily chart (chart courtesy of http://stockcharts.com). The market reached new record last week, but then it reversed the uptrend. We saw negative technical divergences - the most common divergences are between asset’s price and some indicator based on it (for instance the index and RSI or MACD 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 market formed a negative candlestick chart pattern called "bearish engulfing". It consists of a smaller white candlestick followed by a black candlestick that "engulfs" the white one. This downward reversal pattern has been confirmed by last week's Wednesday's move down. Consequently the market continued its downtrend, as it broke below the upward trend line on Monday. If the price breaks below support level of $170 and then below its previous daily gap up, it could continue towards $150 again:
Now let's take a look at Facebook, Inc. (FB) daily chart. It fell almost 10% on Monday and Tuesday, as it broke below its medium-term consolidation and potential downward reversal head-and-shoulders pattern. Monday's daily gap down acts a resistance level now. Overall, the stock remains relatively weaker than technology stocks sector and the whole broad stock market. It bounced off support level at $160-165 again, but the nearest important level of resistance is at around $170:
Dow Jones Remains Below 25,000 Mark
The Dow Jones Industrial Average daily chart shows that blue-chip index was relatively weaker than the broad stock market and much weaker than record-breaking technology stocks recently, as it continued to trade well below late February local high. The market broke below 25,000 mark, as it retraced more of its recent rebound. Possible support level is at around 24,250, marked by previous local low. If the index breaks lower, it could continue towards February 9 panic low. In late February, there was a negative candlestick pattern called Dark Cloud Cover, a pattern in which the uptrend continues with a long white body, and the next day it reverses following higher open and closes below the mid-point between open and close prices of the previous day. It acted as a resistance level. The index trades within an over-week-long consolidation, as we can see on the daily chart:
Concluding, the S&P 500 index will open lower today, as investors' sentiment worsens after yesterday's Fed's interest rate hike. Will it continue below the level of 2,700? For now, it looks like it could bounce here and extend its short-term fluctuations.
Last week's rally failed to continue following negative political news releases. Was this just quick profit-taking action or more meaningful downward reversal? It's hard to say right now, but Monday's sell-off made medium-term bullish case less likely. There is also a negative over-month-long rising wedge pattern. If stocks continue lower from here, then they will probably reach or exceed February panic low.
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Paul Rejczak
Stock Trading Strategist
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