Briefly:

Intraday trade: Our Tuesday's intraday trading outlook was neutral. The market opened virtually flat and closed 1.2% lower. The S&P 500 index retraced its Monday's move up. We may see some more fluctuations following quick rebound off February lows. We prefer to be out of the market again, 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

Stocks retraced their Monday's move up yesterday, as the main indexes lost 1.2-1.3% vs. their previous closing prices. Investors took short-term profits off the table following breakout above last week's consolidation. The S&P 500 index fell below its Monday's daily gap up, and it is currently around 4.5% below January 26 record high of 2,872.87. The Dow Jones Industrial Average and the technology Nasdaq Composite lost 1.2% yesterday.

The nearest important level of resistance of the S&P 500 index remains at around 2,790-2,800, marked by short-term local highs. The next resistance level is at the February 2 daily gap down of 2,808.92-2,812.70. On the other hand, support level is at around 2,740-2,750, marked by last week's fluctuations. The next level of support remains at 2,700-2,720, among others. If the market continues higher, potential resistance level would be at 2,840-2,850, marked by the late January daily gap down.

The S&P 500 index reached its record high a month ago 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. However, 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? It still looks like an upward correction, but the index is closer to retracing the whole sell-off:

Flat Expectations

The index futures contracts trade between 0.0% and +0.1% vs. their yesterday's closing prices right now. It means that investors' expectations ahead of the opening of trading session are virtually flat, and stocks may extend their fluctuations at the open. Will they continue lower? It may depend on series of economic data releases: Preliminary GDP number at 8:30 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 European stock market indexes have lost 0.2-0.5% so far, as investors reacted to yesterday's U.S. stock market move down.

The S&P 500 futures contract is within an intraday consolidation, as it fluctuates following yesterday's move down. It trades along the level of 2,750, after bouncing off resistance level at around 2,790-2,800. Potential support level is at 2,740, marked by recent local highs and lows. The next support level is at 2,680-2,700, marked by last week's local low, among others. The futures contract retraces some of its recent move up, as we can see on the 15-minute chart:

Nasdaq Bounces Off 7,000 Mark

The technology Nasdaq 100 futures contract follows a similar path, as it fluctuates after its yesterday's move down. The market backed off from its local high above 7,000 mark. It has retraced almost all of its severe late January - early February move down. So, it was a quite spectacular show of strength. But will tech stocks continue higher despite some short-term technical overbought conditions? The market may be forming some medium-term double top pattern here. For now, it looks like a new leg within a bull market, but we may see more volatility. Resistance level remains at around 7,000-7,050, marked by record high. On the other hand, support level is at around 6,900, among others. The Nasdaq futures contract remains slightly above the level of 6,900, as the 15-minute chart shows:

Apple, Amazon Reached New Highs but Closed Lower

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 yesterday, as it broke slightly above $180 mark. Then it reversed its intraday advance and closed lower. We can see some negative technical divergences that may lead to a downward correction:

Amazon.com, Inc. stock (AMZN) reached new record high yesterday, before closing lower. The stock trades well above its end of year closing price of $1,167.5. AMZN bounced off its upward trend line more than two weeks ago, following downward correction below the price of $1,300. We can see some negative technical divergences along with overbought conditions. Will they lead to a downward correction? The stock may retrace some of its recent rally and it would accelerate downwards following breakdown below $1,500 mark:

The Dow Jones Industrial Average daily chart shows that blue-chip index reversed its uptrend a month ago. The price broke below the level of 26,000 and continued much lower. 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 two weeks ago. We saw positive candlestick chart pattern that day. 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 broke above the resistance level of around 25,500 on Monday, but it failed to continue higher. It closed much lower yesterday following higher open. We can see potential negative 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. So, it is a potential uptrend reversal:

Concluding, the S&P 500 index retraced its Monday's move up yesterday, and then it closed below Monday's daily gap up. The broad stock market sharply reversed its short-term uptrend. Investors took profits off the table, but was it just profit-taking? We may see some volatility today, as investors will react to economic data releases. We are at the end of the month, so we may also see some potentially bullish 'window dressing' action.

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 index extended its rebound on Monday and Tuesday, and it continued well above 61.8% retracement of the sell-off.

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 sets 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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