Briefly:
Intraday trade: Our Monday's intraday outlook was neutral. The S&P 500 index gained 2.7% after opening 1.2% higher. Expectations before the opening of today's trading session are positive again, so stocks will probably continue their yesterday's run-up. However, we may see some more intraday volatility at resistance levels today. Therefore, 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
The main U.S. stock market indexes gained between 2.7% and 3.3% on Monday, retracing their Friday's sell-off, as investors' sentiment much improved. The S&P 500 index bounced off support level at 2,600. It currently trades 7.5% below January 26 record high of 2,872.87. The Dow Jones Industrial Average gained 2.9%, and the technology Nasdaq Composite gained 3.3% on Monday.
The nearest important level of resistance of the S&P 500 index is now at around 2,690-2,710, marked by March 22 daily gap down of 2,695.68-2,709.79. The next resistance level is at 2,740, marked by previous local high. On the other hand, the nearest important support level is at 2,640-2,650. The next level of support is at 2,585-2,600, marked by Friday's and Monday's 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. The market still seems to be in the middle of two possible future scenarios. The bearish case leading us to February low or lower after breaking below medium-term upward trend line, and the bullish one with medium-term double top pattern or breakout higher. Last week's sell-off made the bearish case much more likely, almost a certainty. However, yesterday's rally gave bulls another chance. 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:
Positive Expectations Again
Expectations before the opening of today's trading session are positive, because the index futures contracts trade 0.5-0.9% higher vs. their Monday's closing prices. The European stock market indexes have gained 1.4-1.9% so far. Investors will wait for the Consumer Confidence number release at 10:00 a.m. Will stocks extend their Monday's rebound much further? The market will probably retrace more of its Thursday's move down, but we may see some selling pressure at the resistance level of Thursday's daily gap down. For now, bulls are on the run.
The S&P 500 futures contract trades within an intraday uptrend, as it continues its Monday's rally. The market gets closer to the resistance level of 2,680-2,700. On the other hand, level of support is at 2,640-2,660, marked by some short-term fluctuations. The next support level remains at 2,600-2,620. The futures contract trades just below its resistance level, as we can see on the 15-minute chart:
Nasdaq Relatively Stronger
The technology Nasdaq 100 futures contract follows a similar path, as it trades within an intraday uptrend. It accelerated its downtrend on Friday, as it moved towards 6,500 mark. The market opened higher yesterday, before quickly retracing most of the rebound. But then it rallied much higher. It currently trades above the level of 6,800, after gaining more than 300 points from Friday's low. Potential resistance level is at 6,900-6,950, marked by previous consolidation. On the other hand, support level is at 6,750-6,800. The support level is also at 6,700-6,720, marked by recent local highs. The Nasdaq futures contract trades along its intraday upward trend line, as the 15-minute chart shows:
Apple Sharply Reverses Higher, Facebook Bounces Off $150
Let's take a look at Apple, Inc. stock (AAPL) daily chart (chart courtesy of http://stockcharts.com). The market reached new record two weeks ago, 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. Consequently the market continued its downtrend, as it broke below the upward trend line a week ago. Since then it accelerated downwards. Yesterday we wrote that the price may bounce off support level at $160-165. And it did. Is this the end of a downtrend and the beginning of a new uptrend? For now, it looks like some strong upward correction:
Now let's take a look at Facebook, Inc. (FB) daily chart. It broke below its medium-term consolidation and potential downward reversal head-and-shoulders pattern last week following Cambridge Analytica data breach news. The price accelerated towards $150 yesterday, before bouncing off that support level. On the other hand, previous support level of $170 acts as a resistance level. The market fell the lowest since July of 2017 on Monday. Yesterday's bounce is a short-term positive signal:
Dow Jones Above 24,000 Again
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 its early March local low on Thursday, and it continued below the level of 24,000 on Friday. In late February, we saw 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. Since then, it acted as a resistance level. The index got close to its February 9 low and it acted as a short-term support level yesterday. Was this an upward reversal or just dead-cat-bounce correction before another leg lower? Well, the market is still below its medium-term downward trend line which is currently at around 25,000:
Concluding, the S&P 500 index may continue its Monday's upward march today, but the upside seems limited by resistance level of Thursday's daily gap down along the level of 2,700. Was yesterday's rally an upward reversal and the end of sell-off since March 13 local high? It's hard to say. For now, it looks like a strong upward correction.
The early March rally failed to continue following monetary policy tightening, trade war fears, negative political news. What was just profit-taking action, quickly became a meaningful downward reversal. Last week's Monday's sell-off and breakdown below over-month-long rising wedge pattern made medium-term bearish case more likely, and after some quick consolidation, the index accelerated lower on Thursday and Friday. Just like we wrote in our several Stocks Trading Alerts, the early February sell-off set the negative tone for weeks or months to come.
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
Stock Trading Alerts
