Briefly:

Intraday trade: Our yesterday's bearish intraday outlook has proved very accurate. The S&P 500 index reached our profit target level of 2,455 or 22 points below Friday's closing price following slightly lower opening of the trading session. The broad stock market index may fluctuate within a relatively narrow trading range today, after yesterday's rebound off support level. Therefore, we prefer to be out of the market, 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 2,510, and profit target at 2,300, S&P 500 index).

Our intraday outlook is neutral, 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 lost between 0.8% and 1.1% on Tuesday, retracing some of their last week's rally, as investors took short-term profits off the table. The S&P 500 index reversed its short-term uptrend following a bounce off resistance level, marked by the August 8 all-time high of 2,490.87. Then it fell below last Thursday's daily gap up of 2,460.31-2,462.65. It currently trades 1.3% off its record high. The nearest important level of support is at 2,450, marked by recent fluctuations, and the next support level is at around 2.430-2,435, marked by previous daily gap up of 2,430.58-2,433.67 and last week's Wednesday's daily low. The broad stock market remains within an over-month-long consolidation following November-July uptrend. Will it continue higher? Or is this some medium-term topping pattern before downward reversal?

Mixed Expectations

Expectations before the opening of today's trading session are mixed, with index futures currently between -0.1% and +0.1% vs. their yesterday's closing prices. The main European stock market indexes have lost 0.2-0.6% so far. Investors will now wait for some economic data announcements: ISM Services number at 10:00 a.m., Beige Book release at 2:00 p.m. The market expects that the ISM Services index was at 55.8 in August. The S&P 500 futures contract trades within an intraday consolidation following an overnight move up. The market has retraced some of its yesterday's move down. The nearest important level of support is at around 2,445-2,450, marked by yesterday's local lows. On the other hand, resistance level is at 2,465-2,470, marked by recent consolidation. Is this a new uptrend or just bounce off support level before another leg down? The futures contract has been trading within a slight downtrend since Friday, as we can see on the 15-minute chart:

Nasdaq Also Fluctuates

The technology Nasdaq 100 futures contract follows a similar path, as it fluctuates after yesterday's bounce off support level. The nearest important level of resistance is at around 5,970-5,980, and the next resistance level is at 6,000-6,020, marked by new record high. On the other hand, support level remains at 5,880-5,900, marked by yesterday's local lows, among others. Will the market break above short-term downward trend line and continue higher?

Concluding, the S&P 500 index retraced some of its last week's rally yesterday, as investors took short-term profits off the table. Is this a new downtrend or just downward correction? The broad stock market extends its over-month-long consolidation. There have been no confirmed short-term negative signals so far. However, we still can see some medium-term overbought conditions along with negative technical divergences.

Therefore, 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). Stop-loss level is at 2,510 and potential profit target is 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: 2,510
S&P 500 futures contract (September) - short position: profit target level: 2,297; stop-loss level: 2,507
SPY ETF (SPDR S&P 500, not leveraged) - short position: profit target level: $230; stop-loss level: $251
SDS ETF (ProShares UltraShort S&P500, leveraged: -2x) - long position: opening price: $12.56; profit target level: $13.98; stop-loss level: $11.82

Thank you.

Paul Rejczak
Stock Trading Strategist
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