Trading position (short-term, our opinion; levels for S&P 500 continuous futures contract): short positions with an entry at 4,435 price level, with a stop-loss level of 4,550 and 4,200 as a price target.

The S&P 500 index retraced some of its recent losses yesterday, but will it reverse its short-term downtrend? We may see more downside.

The broad stock market index gained 0.85% on Wednesday as it retraced its Tuesday’s decline to new local low of 4,435.46. On September 2 the index reached a new record high of 4,545.85. Since then it has lost over 110 points. This morning stocks are expected to open virtually flat following some better than expected economic data releases.

The index remains elevated after the recent run-up, so we may see some more profound profit-taking action at some point.

The nearest important support level of the broad stock market index is now at 4,435-4,450 and the next support level is at 4,400-4,410. On the other hand, the nearest important resistance level is now at 4,490-4,500, marked by the previous support level. The S&P 500 bounced off its over four-month-long upward trend line, as we can see on the daily chart (chart by courtesy of http://stockcharts.com):

Our Short Position – Still In Play

Let’s take a look at the hourly chart of the S&P 500 futures contract. We opened a short position on August 12 at the level of 4,435. The position was profitable before the recent run-up. We still think that a speculative short position is justified from the risk/reward perspective. (chart by courtesy of http://tradingview.com):

Conclusion

The S&P 500 index extended its short-term downtrend on Tuesday, but yesterday it has retraced the recent decline. Today we will most likely see another flat opening of the trading session – we may see more short-term consolidation.

The market seems overbought, and we may see some more profound downward correction soon. Therefore, we think that the short position is justified from the risk/reward perspective.

Here’s the breakdown:

• The market retraced more of its recent advances this week, as the S&P 500 index extended its decline below 4,450 level.
• Our speculative short position is still justified from the risk/reward perspective.
• We are expecting a 5% or bigger correction from the record high.

As always, we’ll keep you, our subscribers, well-informed.

Trading position (short-term, our opinion; levels for S&P 500 continuous futures contract): short positions with an entry at 4,435 price level, with a stop-loss level of 4,550 and 4,200 as a price target.

Thank you.

Paul Rejczak,
Stock Trading Strategist
Sunshine Profits: Effective Investments through Diligence and Care