Briefly:
Intraday trade: Our Monday's intraday trading outlook was bearish. It proved wrong because the S&P 500 index gained 0.4% following slightly higher opening. The market didn't reach our stop-loss level. The index may retrace some of its recent rally today following neutral opening of the trading session. However, there have been no confirmed negative 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, short position is favored (opened on June 5 at 2,437.83, with stop-loss at 2,530, and profit target at 2,300, S&P 500 index).
Our intraday outlook is neutral today, and our short-term outlook is bearish, as we expect downward correction. Our medium-term outlook remains bearish:
Intraday outlook (next 24 hours): neutral
Short-term outlook (next 1-2 weeks): bearish
Medium-term outlook (next 1-3 months): bearish
The U.S. stock market indexes gained between 0.3% and 0.7% on Monday, extending their short-term uptrend, as investors' sentiment remained bullish following last week's move up. The S&P 500 index has reached new record high at the level of 2,529.23, around 10 points above its Friday's record high. The Dow Jones Industrial Average reached new record high at the level of 22,559.38, as it broke above its September 21 local high above 22,400 mark. The technology Nasdaq Composite gained 0.3%, as it was relatively weaker than the broad stock market. However, it reached new all-time high at the level of 6,527.22. The nearest important level of resistance of the S&P 500 index is at around 2,530. On the other hand, level of support is at 2,520, marked by yesterday's daily gap up of 2,519.44-2,520.40. The next support level is at 2,510, marked by previous level of resistance. The support level is also at 2,490, marked by the September 12 daily gap up of 2,488.95-2,490.37, among others. The S&P 500 index accelerated its uptrend recently. We still can see medium-term negative technical divergences, but will they lead to a downward correction?
At New Record High
Expectations before the opening of today's trading session are slightly positive, with index futures currently between +0.1% and +0.15% vs. their yesterday's closing prices. The European stock market indexes have gained 0.1-0.3% so far. There will be no new important economic data announcements. However, investors will now wait for some quarterly corporate earnings releases. The S&P 500 futures contract trades within an intraday consolidation following overnight move up. The nearest important level of resistance is at around 2,530, marked by new all-time high. On the other hand, support level is at 2,515-2,520, marked by recent fluctuations. The next level of support remains at 2,510, marked by previous resistance level. The support level is also at around 2,500. The futures contract continues to trade above short-term upward trend line, as we can see on the 15-minute chart:
Nasdaq Relatively Weaker
The technology Nasdaq 100 futures contract follows a similar path, as it retraces some of its yesterday's rebound off support level at around 5,950-5,960. The nearest important level of resistance is at around 6,000-6,020, marked by the early September record high. On the other hand, support level is at 5,930-5,950, marked by previous level of resistance. The Nasdaq futures contract extends its move up along upward trend line, 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. It rebounded following recent decline. However, it remains relatively weaker than the record-breaking broad stock market gauges. The price bounced off support level at around $150 a week ago. Is this a new uptrend? Or just upward correction before another leg lower? There have been no confirmed positive signals so far. The price continues to trade below short-term resistance level of $155, marked by some previous local lows:
Now, let's take a look at the Dow Jones Industrial Average daily chart (chart courtesy of http://stockcharts.com). The blue-chip index broke above its recent local high, as it reached new record high yesterday. There have been no confirmed negative signals so far. However, we can see some negative technical divergences. The price continues higher, while the technical indicator like RSI (Relative Strength Index) or MACD (Moving Average Convergence/Divergence) forms a lower high. It shows us that even though price reaches new highs, the fuel for the uptrend starts running low. Bearish divergence is a moderately useful tool for detecting a coming reversal in the bullish trend, therefore it needs a confirmation.
Concluding, the S&P 500 index continued higher on Monday, as investors' sentiment remained bullish following last week's gains, and ahead of quarterly corporate earnings releases. The broad stock market has reached new record high. But will uptrend continue even further? We still can see medium-term overbought conditions along with negative technical divergences.
We continue to maintain our medium-term short position (opened at 2,437.83 on June 5 - opening price of the S&P 500 index). We decided to move our stop-loss level up for the first time a week ago, to the level of 2,530 (from 2,510). This will be the final stop-loss for this trade. The stop-loss level is now very close to the current market price. The futures contract reached the stop-loss level at 2,527, but we will wait and see if the S&P 500 index breaks above the level of 2,530. Potential profit target remains at 2,300 (S&P 500 index). One can trade S&P 500 index using futures contracts (S&P 500 futures contract - SP, E-mini S&P 500 futures contract - ES) or an ETF like the SPDR S&P 500 ETF - SPY. It is always important to set some exit price level in case some events cause the price to move in the unlikely direction. Having safety measures in place helps limit potential losses while letting the gains grow.
To summarize: medium-term short position in S&P 500 index is justified from the risk/reward perspective with the following entry prices, stop-loss orders and profit target price levels:
Intraday trade:
No intraday position is justified from the risk/reward perspective today.
Medium-term trade:
S&P 500 index - short position: profit target level: 2,300; stop-loss level: 2,530
S&P 500 futures contract (December) - short position: profit target level: 2,297; stop-loss level: 2,527
SPY ETF (SPDR S&P 500, not leveraged) - short position: profit target level: $230; stop-loss level: $253
SDS ETF (ProShares UltraShort S&P500, leveraged: -2x) - long position: opening price: $50.24; profit target level: $55.92; stop-loss level: $46.46
Thank you.
Paul Rejczak
Stock Trading Strategist
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