Briefly:
Intraday trade: Our Thursday's intraday outlook was neutral. The S&P 500 index opened 0.2% higher and closed 0.1% lower yesterday. The market continued to trade along its support level of around 2,740-2,750 and it will probably extend its short-term consolidation today. There will be so-called "quadruple witching". It refers to an expiration date of futures contracts and options which usually leads to some increased volatility. 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 U.S. stock market indexes were mixed between -0.2% and +0.5% on Thursday, as they extended their short-term fluctuations following Tuesday-Wednesday retreat. The S&P 500 index lost just 0.1% and it remained at the support level of last Friday's daily gap up. It currently trades 4.7% below January 26 record high of 2,872.87. The Dow Jones Industrial Average was relatively stronger than the broad stock market, as it gained 0.5%, and the technology Nasdaq Composite lost 0.2%.
The nearest important level of resistance of the S&P 500 index is at around 2,775-2,780, marked by Wednesday's daily high. The next resistance level is at 2,790-2,800, marked by short-term local highs. On the other hand, support level is at 2,740-2,750, marked by Friday's daily gap up of 2,740.45-2,751.54. The next level of support is at 2,700-2,720, among others.
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. However, the most likely scenario may be that stocks go sideways for a while, and it would be the worst future scenario:
Flat Expectations, Lots of Data Ahead
Expectations before the opening of today's trading session are virtually flat, because the index futures contracts trade very close to their yesterday's closing prices. The European stock market indexes have gained 0.1-0.4% so far. Investors will wait for some economic data announcements: Housing Starts, Building Permits at 8:30 a.m., Industrial Production, Capacity Utilization at 9:15 a.m., Michigan Sentiment number at 10:00 a.m. The S&P 500 index is at its last Friday's daily gap up, which acts as a short-term support level. If the market breaks lower, it could continue towards the level of 2,700. But for now, it looks like a downward correction. So, we will likely see more fluctuations above support level of 2,740-2,750, and below resistance level of 2,800.
The S&P 500 futures contract trades within an intraday consolidation and it extends its three-day-long trading range. The nearest important level of support remains at around 2,745-2,750, marked by local low, among others. On the other hand, resistance level is at 2,760-2,765. The next resistance level is at 2,775-2,785, marked by recent local highs. The futures contract is now above its short-term downward trend line, as we can see on the 15-minute chart:
Nasdaq Still Above 7,000
The technology Nasdaq 100 futures contract was stronger than the broad stock market recently, as it broke above 7,000 mark and continued reaching new record highs. 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. The Nasdaq futures contract was above 7,200 mark on Monday, before reversing lower and retracing most of its Friday's rally. Since then, it keeps bouncing off support level at 7,000-7,050. The Nasdaq futures contract continues to fluctuate along that support level, as the 15-minute chart shows:
Two Biggest Market Caps Reversed Their Uptrend?
Let's take a look at Apple, Inc. stock (AAPL) daily chart (chart courtesy of http://stockcharts.com). It was one of February 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 early February losses. The market reached new record high on Tuesday, but then it reversed its intraday uptrend and closed below $180. We can see some negative medium-term 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. On Tuesday, 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 Wednesday's move down:
Amazon.com, Inc. stock (AMZN) continued its uptrend recently, as it reached new record high above the price of $1,600. The stock reversed its upward course on Tuesday and closed below previous day's closing price. Tuesday's trading action was bearish, as the stock formed a similar to the above-mentioned bearish engulfing pattern. The nearest important level of resistance remains at around $1,600, and we still can see negative technical divergences:
Dow Jones Bounces but Remains Below 25,000
The Dow Jones Industrial Average daily chart shows that blue-chip index remains relatively weaker than the broad stock market and much weaker than record-breaking technology stocks, as it still trades well below late February local high. The market broke below 25,000 mark on Wednesday, 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, as we can see on the daily chart:
Concluding, the S&P 500 index may continue to fluctuate within its short-term consolidation following recent move down. We prefer to be out of the market again, avoiding low risk/reward ratio trades. However, if sentiment worsens considerably and the index continues lower, we would think about buying the dip (within the support level of 2,700-2,720).
The rally failed to continue following negative political news release. Was this just quick profit-taking action or more meaningful downward reversal? It's hard to say right now. Stocks will probably open virtually flat today, and the outlook is somewhat better than yesterday, as the index continues to trade above its support level. However, it seems that the overall market risk is higher than in the late February when S&P 500 was trading at the same level.
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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