Briefly:

Intraday trade: Our Tuesday's intraday trading outlook was bearish. It proved partly accurate because the S&P 500 index lost 0.2% (neutral), following lower opening of the trading session. The market extended its short-term consolidation, as it bounced off support level at 2,565-2,570 again. We still can see technical overbought conditions along with negative divergences. Therefore, intraday short position is favored. Stop-loss is at the level of 2,605 and potential profit target is at 2,555 (S&P 500 index).

Medium-term trade: In our opinion, no medium-term positions are justified.

Our intraday outlook is bearish today. Our short-term outlook is neutral, and our medium-term outlook is neutral:

Intraday outlook (next 24 hours): bearish
Short-term outlook (next 1-2 weeks): neutral
Medium-term outlook (next 1-3 months): neutral

The main U.S. stock market indexes lost between 0.1% and 0.3% on Tuesday, extending their short-term consolidation following last week's volatility, as investors took some profits off the table. The S&P 500 index retraced its recent advance, as it fell slightly below the level of 2,570, before bouncing off that support level again. It currently trades around 0.7% below last week's Tuesday's new all-time high of 2,597.02. The Dow Jones Industrial Average continued to fluctuate within its four-session-long consolidation, as it lost 0.1%. The technology Nasdaq Composite was relatively weaker than the broad stock market, as it lost 0.3%. The nearest important level of support of the S&P 500 index is at 2,565-2,570, marked by recent local lows. The next support level is at 2,545-2,560, marked by some previous local lows. On the other hand, the nearest important level of resistance is at 2,585-2,590, marked by short-term fluctuations. The next resistance level is at around 2,600, marked by Tuesday's record high of 2,597.02. The S&P 500 index fluctuates following its September-November rally. Is this a topping pattern or just pause before another leg up? There have been no confirmed negative signals so far. However, we still can see medium-term technical overbought conditions:

Negative Expectations

Expectations before the opening of today's trading session are negative, with index futures currently down 0.5% vs. their Tuesday's closing prices. The European stock market indexes have lost 0.6-1.1% so far, following Japanese Nikkei's daily loss of 1.6%. Investors will wait for series of economic data announcements: Consumer Price Index, Retail Sales, Empire State Manufacturing number at 8:30 a.m., Business Inventories at 10:00 a.m., Crude Oil Inventories at 10:30 a.m. The market expects that Consumer Prices Inflation grew 0.1% and Retail Sales were unchanged in October. The S&P 500 futures contract trades within an intraday downtrend, as it retraces its yesterday's intraday rebound off support level at around 2,560-2,565. The nearest important level of resistance is at 2,575-2,580, marked by some recent local highs. The next resistance level is at 2,585, among others. The futures contract trades at its last week's local low, as we can see on the 15-minute chart:

Nasdaq Also Lower

The technology Nasdaq 100 futures contract follows a similar path, as it trades within an intraday downtrend. The market broke below its recent local lows. The nearest important level of resistance is at around 6,280, marked by these previous local lows. The next level of resistance is at 6,320, marked by this week's local highs. On the other hand, support level is at around 6,250, marked by last Thursday's local low. The Nasdaq 100 futures contract is slightly above its Thursday's local low, as the 15-minute chart shows:

Let's take a look at Apple, Inc. stock (AAPL) daily chart (chart courtesy of http://stockcharts.com) again. The price reached new record high on Wednesday last week, as it extended its uptrend following better-than-expected quarterly earnings release. Since then, Apple stock retraces some of this rally. It gets closer to support level of $170, marked by the daily gap up. Will the uptrend continue despite some clear technical overbought conditions? We can say that something (i.e. individual asset, entire market, technical indicator) is overbought when its value rises so high that (according to the technical analysis) it’s unlikely to advance even further. Generally, an overbought market is a sign that a downward correction is likely to occur. Traders 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.

The Dow Jones Industrial Average daily chart (chart courtesy of http://stockcharts.com) shows that blue-chip index broke slightly below its two-month-long upward trend line on Thursday last week. Is this a downward reversal or just quick downward correction? We still can see some short-term negative technical divergences:

Concluding, the S&P 500 index continued to fluctuate on Tuesday, as investors took short-term profits off the table following October-November rally. The broad stock market remains relatively close to last week's new record high. It trades just 0.7% below that high. Is this a topping pattern or just consolidation within medium-term uptrend? There have been no confirmed negative signals so far. However, we still can see medium-term overbought conditions along with negative technical divergences. But will they lead to a downward correction?

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:

S&P 500 index - short position: profit target level: 2,555; stop-loss level: 2,605,
S&P 500 futures contract (September) - short position: profit target level: 2,552; stop-loss level: 2,602
SPY ETF (SPDR S&P 500, not leveraged) - short position: profit target level: $255.5; stop-loss level: $260.5

Medium-term trade:

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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