Briefly:
Intraday trade: Our Tuesday's intraday trading outlook was bearish. It proved accurate, because the S&P 500 lost 1.1% following lower opening of the trading session (-0.7%). Yesterday's daily low fell at 2,818.27, so the market reached our profit target level of 2,820. We still can see some medium-term overbought conditions along with bullish investors' sentiment. However, there are some short-term oversold conditions that may lead to a bounce following two-day-long move down. 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 today. 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 U.S. stock market indexes lost between 0.9% and 1.4% on Tuesday, extending their Monday's move down, as investors continued to take profits off the table following almost month-long rally. The S&P 500 index broke below the level of 2,850, and it got closer to its mid-month consolidation along the level of 2,800. The Dow Jones Industrial Average followed a similar path, as it lost 1.4% getting closer to 26,000 mark. The technology Nasdaq Composite was relatively stronger than the broad stock market, as it lost 0.9%. However, it has managed to remain slightly above its last week's local lows.
The nearest important level of support of the S&P 500 index is at 2,790-2,810, marked by the above-mentioned mid-month consolidation. The next level of support remains at 2,770-2,780, marked by some previous local lows. On the other hand, the nearest important level of resistance is at 2,840-2,850, marked by yesterday's daily gap down of 2,837.75-2,851.48. The next resistance level remains at around 2,870-2,875, marked by Friday's record high of 2,872.87. The resistance level is the price level at which the selling interest is strong enough to overcome buying pressure and push the price lower. It usually refers to to previous high or highs, gap downs, trend lines, retracement levels etc.
We still can see medium-term technical overbought conditions on the daily chart of the S&P 500 index. There is a pretty big chance that the index reached some major medium-term high on Friday. It broke below its month-long upward trend line yesterday, confirming reversal of the uptrend. The market is likely to continue lower, but its short-term downside potential may be limited by a support level of 2,800:
Positive Expectations, Reversal Or Just Bounce?
Expectations before the opening of today's trading session are positive, because index futures trade 0.2-0.3% higher vs. their Tuesday's closing prices. The European stock market indexes have been mixed so far. Investors will wait for some economic data announcements: ADP Non-Farm Payrolls Change number at 8:15 a.m., Chicago PMI at 9:45 a.m., Pending Home Sales at 10:00 a.m., Crude Oil Inventories at 10:30 a.m. The market expects that the ADP Non-Farm Payrolls number was at +186,000, and the Chicago PMI was at 64.2 in January.
The S&P 500 futures contract trades within an intraday consolidation, as it fluctuates following yesterday's sell-off. For now, it looks like some relatively flat correction within a short-term downtrend. Will it continue lower? It may reach support level of 2,815-2,820, marked by yesterday's daily lows. However, we can see some short-term oversold conditions. So, the market may bounce there. Unless it breaks below support level and then, it may continue to the next support level of 2,800. On the other hand, resistance level is at 2,840-2,845, marked by local highs. The next level of resistance is at 2,850-2,855, among others. The futures contract trades above its intraday upward trend line, as we can see on the 15-minute chart:
Nasdaq Also Higher
The technology Nasdaq 100 futures contract retraced some of its yesterday's move down, as it bounced off support level at around 6,900. The market retraced around 150 points off its Monday's overnight record high. It's a downward correction within an uptrend, but will it continue lower? It's hard to say, considering series of this week's important quarterly corporate earnings (today we'll see reports from Microsoft, Facebook, tomorrow Apple, Amazon, among others) along with Friday's monthly employment data releases. The nearest important level of support is at around 6,900. On the other hand, level of resistance is at 6,980-7,00, marked by previous support level. The Nasdaq 100 futures contract fluctuates within its last week's consolidation, but it remains below three-day-long downward trend line, as the 15-minute chart shows:
Let's take a look at Apple, Inc. stock (AAPL) daily chart (chart courtesy of http://stockcharts.com) - 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. It was relatively weak vs. the broad stock market recently, as it continued its short-term downtrend. 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 November-December lows yesterday. The stock trades within a potential support level of $165-170. Will it bounce ahead of tomorrow's quarterly earnings release?
On the other hand, Amazon.com, Inc. stock (AMZN) remains relatively very strong vs. the broad stock market. It continued its month rally yesterday, despite an overall stock market weakness - following Friday's breakout above $1400 mark. Amazon is expected to release its quarterly earnings tomorrow. We will probably see some "buy rumors, sell news" profit taking action:
The Dow Jones Industrial Average daily chart shows that blue-chip index retraced weeks-long record-breaking move up yesterday. For now, it looks like a 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. The market got close to its previously broken rising wedge pattern. Will it act as a support level now?
Concluding, the S&P 500 index lost 1.1% on Tuesday, as it extended its Monday's move down. The broad stock market retraced its last week's advance, breaking below Tuesday-Thursday consolidation. Is this a new downtrend or just correction following month-long rally? For now, it looks like a correction, but we still see technical overbought conditions along with overly bullish investors' sentiment - there is no fear.
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:
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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