Briefly:

Intraday trade: Our Thursday's intraday trading outlook was neutral. The S&P 500 index opened virtually flat and closed 1.3% lower. The market continued its short-term downtrend following Tuesday's reversal. Stocks will probably continue their downtrend today. However, downside potential seems limited. There are some technical oversold conditions that may lead to a bounce. We prefer to be out of the market, 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

Thursday's trading session was a clear win for the bears, as the main U.S. stock market indexes lost between 1.3% and 1.7% following economic news releases. Stocks accelerated their short-term downtrend, so news release was just a catalyst. The S&P 500 index lost 1.3% and it broke below 2,700 mark. The broad stock market gauge is currently trading 6.8% below January 26 record high of 2,872.87. The Dow Jones Industrial Average lost 1.7%, as it was relatively weaker than the broad stock market again and the technology Nasdaq Composite lost 1.5% yesterday.

The nearest important level of resistance of the S&P 500 index is now at around 2,700, marked by previous consolidation. The next resistance level remains at 2,750, marked by short-term local highs. On the other hand, support level is at 2,760-2,770, marked by local low. If the market continues lower, potential level of support would be at 2,640-2,650, marked by previous short-term consolidation.

The S&P 500 index reached its record high on 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 on February 9, 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 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 seems to be 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. Yesterday's move down made the bearish case more likely. However, the most likely scenario may be that stocks go sideways for a while:

Negative Expectations Once Again

Expectations before the opening of today's trading session are negative, because index futures contract trade 0.5-0.7% lower vs. their yesterday's closing prices. The European stock market indexes have lost 1.0-1.7% so far. Investors will wait for the Michigan Sentiment number release at 10:00 a.m. It looks like stocks may extend their decline this morning, but will they continue lower? We will probably see temporary bottom and a bounce at some point.

The S&P 500 futures contract is within an intraday downtrend, as it retraces its small overnight bounce off support level at around 2,660. For now, it looks like another relatively flat correction within a short-term downtrend. The next important level of support is at around 2,630-2,640, marked by previous fluctuations. On the other hand, level of resistance is now at 2,680-2,685, marked by short-term local high. Potential resistance level is also at previous support level of 2,700. The futures contract remains below its short-term downward trend line, as we can see on the 15-minute chart:

Nasdaq Follows Broad Stock Market

The technology Nasdaq 100 futures contract follows a similar path, as it trades closer to short-term local low after an overnight bounce. The market retraces more of its recent rally. A rally that retraced most of its severe late January - early February decline. Is this a new downtrend or just downward correction following the rally? One thing is for sure, volatility is much higher than months ago. The nearest important level of support is at around 6,680-6,700, and resistance level is at 6,750-6,780, marked by local highs. The Nasdaq futures contract trades along its short-term support level, as the 15-minute chart shows:

Apple and Amazon Back Off From Record Highs

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 broad stock market rebound rally. It fell close to support level of $150 on February 9. Since then, it was retracing its early February losses. The market reached new record high on Wednesday, as it was trading above $180 mark again. Then it reversed its intraday advance and closed lower, just like on Tuesday. Yesterday we wrote that there were some negative technical divergences and they may lead to a downward correction. The stock sold-off sharply and closed at $175 on Thursday. Is this a new downtrend or just downward correction? It's hard to say, but new record highs scenario seems less likely in the near future:

Amazon.com, Inc. stock (AMZN) reached new record high on Wednesday. The stock continues to trade well above its end of year closing price of $1,167.5. AMZN bounced off its upward trend line three weeks ago following downward correction below the price of $1,300. We can see some negative technical divergences along with overbought conditions. The stock may continue retracing its recent rally, but it remains remarkably stronger than the broad stock market:

Dow Jones Leads Lower

The Dow Jones Industrial Average daily chart shows that blue-chip index reversed its three-week-long rally from February 9 low. The market broke above the resistance level of around 25,500 on Monday, but it failed to continue higher. It closed much lower on Tuesday following higher open. We saw potential negative candlestick pattern called Dark Cloud Cover. It is 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. This negative downward reversal pattern has been confirmed by Wednesday's move down. Consequently, the index broke below 25,000 mark yesterday. For now, it looks like a downward correction after rallying off February panic low. The market trades at a potential support level, and it is some "make or break" situation:

Concluding, the S&P 500 index continued its short-term downtrend yesterday, as it broke below potential support level of 2,700. The broad stock market sharply reversed its short-term uptrend on Tuesday and it basically confirmed the downward reversal on Wednesday. Earlier in the week, the market extended its three-week-long rebound and continued well above 61.8% retracement of the sell-off. Then it quickly reversed its upward course. Is this a new downtrend or just correction following rally from February 9 low? It looks like a downward correction, but we probably didn't see the bottom yet.

The broad stock market was falling almost 12% off its late January record high on February 9 before an intraday reversal. It was a final panic selling ahead of short-term upward reversal, and the market found a support of its medium-term upward trend line, which was at 2,550. The S&P 500 index retraced its whole month-long January rally and fell the lowest since early October. Then it retraced more than 61.8% of this relatively quick and deep sell-off. So, medium-term picture is now rather neutral. 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. This sell-off set the negative tone for weeks or months to come, despite recent broad stock market rebound.

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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