Briefly:
Intraday trade: Our Monday's intraday trading outlook was neutral. It proved wrong, because the S&P 500 lost 4.1% following lower opening of the trading session (-0.8%). The market retraced its whole January rally, and basically crashed below the level of 2,700. There is a growing possibility of a short-term bounce. However, there have been no confirmed short-term positive signals so far. Therefore, we prefer to be out of the market today, avoiding low risk/reward ratio trades.
Medium-term trade: In our opinion, no medium-term positions are justified.
Our intraday outlook is neutral again. 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 lost 3.8-4.6% on Monday, accelerating their short-term downtrend following Friday's 2.0-2.5% sell-off. In just two days of trading, stocks retraced the whole month-long January rally. The S&P 500 index broke below 2,700 mark, and continued towards the level of 2,600. It reached daily low of 2,638.17. So, the broad stock market fell 234.70 points or 8.2% off its January 26 record high at 2,872.87. The Dow Jones Industrial Average lost 4.6%, and the technology Nasdaq Composite was relatively slightly stronger, as it lost 3.8%.
The nearest potential level of support of the S&P 500 index is at around 2,600-2,620, marked by some early December fluctuations. The next support level is at 2,540-2,560, among others. On the other hand, level of resistance is at 2,680-2,700, marked by previous support level. The next resistance level remains at 2,750-2,760, marked by yesterday's daily high.
The index reached its record high just a week ago on Friday. It broke below its month-long upward trend line on Tuesday last week following gap-down opening of the trading session, confirming reversal of the uptrend. Then it retraced all of its January rally and continued lower. It looks like some perfectly bearish scenario, or the crash. Will it continue lower or bounce here? We know one thing for sure, the volatility is back and the market became less predictable in the short-term. However, we also can see that stocks are sharply reversing their medium-term upward course following the whole retracement of last month's euphoria rally:
Increased Volatility
The index futures contracts trade between -0.9%% and -0.5% vs. their yesterday's closing prices this morning. So, investors' expectations before the opening of today's trading session are negative ahead of the opening of the trading session. The European stock market indexes have lost 2.1-2.4% so far. Investors will wait for some economic data releases: Trade Balance at 8:30 a.m., JOLTS Job Openings number at 10:00 a.m. Investors will also wait for more quarterly corporate earnings announcements.
The S&P 500 futures contract trades within an intraday consolidation, following an overnight sell-off and over-100-points bounce off the low at around 2,530. Investors continued to panic, sending the market well below its yesterday's closing price. So far, it looks like a "dead cat bounce". There have been no confirmed positive signals so far. We may see some volatile fluctuations following Friday-Monday sell-off. The nearest important level of resistance is now at around 2,650, marked by local high. The next resistance level is at 2,700, among others. On the other hand, support level is at 2,530-2,550. The futures contract retraced some of its recent decline, but so far it is just an upward correction, as we can see on the 15-minute chart:
Tech Stocks Also Much Lower
The technology Nasdaq 100 futures contract followed a similar path, as it bounced off its new overnight low. It fell below the level of 6,300, and it was trading over 7,000 mark just days ago. The market lost more than 10% off its record high within just over a week. Is this a new medium-term downtrend or just some scary and over-extended correction? Time will tell. We may see some increased volatility and a short-term profit potential. The nearest important level of support is at around 6,400, and the next support level is at 6,250-6,300. On the other hand, resistance level is at 6,500-6,550, among others. The Nasdaq futures contract trades within a consolidation along the level of 6,300-6,500, as the 15-minute chart shows:
Let's take a look at Apple, Inc. stock (AAPL) daily chart (chart courtesy of http://stockcharts.com). It was one of the main drivers of this recent stock market sell-off. The stock reached new record high around three weeks ago, following short-term consolidation along the support level of $175. The market got closer to $180 mark, but it failed to continue higher. Consequently, the stock retraced its January advance and continued lower. It accelerated its decline on Friday, as it got closer to $160. Then, it broke below that support level yesterday. We can see some short-term oversold conditions, but no confirmed positive signals so far:
On the other hand, Amazon.com, Inc. stock (AMZN) was relatively strong vs. the broad stock market recently. Despite an overall weakness, it was extending its month-long rally up until Friday. The stock remains well above its end of year closing price of $1,167.5. However, the market may be trading within some medium-term topping pattern here:
The Dow Jones Industrial Average daily chart shows that blue-chip index broke below its short-term consolidation on Friday. The price sharply accelerated its downtrend yesterday, as it broke below the level of 25,500 and continued towards 24,000 mark. 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 broke below its three-month-long upward trend line and it retraced most of the November-January rally. Is this a new downtrend or still just correction? We can see technical oversold conditions, so the blue-chip index may bounce at some point. However, the overall medium-term picture is now bearish:
Concluding, the S&P 500 index lost more than 4% on Monday, following its Friday' sell-off. The broad stock market retraced its whole month-long January rally, so the medium-term picture is now bearish. 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. So, is this just downward correction or the beginning of a new medium-term downtrend? Friday-Monday's sell-off sets the negative tone for weeks or months to come.
The S&P 500 index traded around 7.5% above its December 29 yearly closing price on Friday January 26. This almost month-long rally seemed unprecedented. The legendary investor John Templeton once said that "bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria”. So, now it looks like it was an euphoria phase of the nine-year-long bull market. Did it die over this weekend? It's hard to say, but new record highs scenario seems very unlikely now.
We could see some medium-term overbought conditions before this huge sell-off. We can 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. Paying attention to the overbought/oversold status of the market is very useful, but there are many other factors that need to be considered before placing a trade.
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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