Briefly:

Intraday trade: Our Tuesday's intraday outlook was neutral. The S&P 500 index opened 0.3% higher and closed 0.6% lower yesterday. The trend was bearish, but the market fluctuated around its Monday's closing price. Index will probably continue to fluctuate below the resistance level of 2,800. Therefore, we prefer to be out of the market, avoiding low risk/reward ratio trades.

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

Our intraday outlook is neutral. 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 0.6-1.0% on Tuesday after opening higher and reaching new local highs within a short-term uptrend. The S&P 500 index lost 0.6% after bouncing off 2,800 mark. It reached its daily high at the level of 2,801.90. The broad stock market index currently trades 3.7% below January 26 record high of 2,872.87. The Dow Jones Industrial Average lost 0.7% and the technology Nasdaq Composite lost 1.0% after reaching new record high above the level of 7,600.

The nearest important level of resistance of the S&P 500 index remains at 2,790-2,800, marked by short-term local highs. The next possible level of resistance is at 2,830-2,840, marked by some late January highs. On the other hand, support level is at 2,740-2,750, marked by Friday's daily gap up of 2,740.45-2,751.54. The next level of support remains at 2,700-2,720, among others.

The S&P 500 index reached its record high on January 26. It broke below month-long upward trend line, as it confirmed uptrend's reversal. Then the broad stock market gauge retraced all of its January rally and continued lower. The index extended its downtrend on February 9, as it was almost 12% below the late January record high. We can see that stocks reversed their medium-term upward course following whole retracement of January euphoria rally. Then the market bounced off its almost year-long medium-term upward trend line, and it retraced more than 61.8% of the sell-off within a few days of trading. Is this just an upward correction or uptrend leading to new all-time highs? The market seems to be in the middle of two possible future scenarios. The bearish case leads us to February low or lower after breaking below medium-term upward trend line, and the bullish one means potential double top pattern or breakout above the late January high. The index trades within an over-month-long rising wedge pattern:

Positive Expectations

Expectations before the opening of today's trading session are positive, because the index futures contracts trade 0.3-0.4% above their Tuesday's closing prices. The main European stock market indexes have gained 0.2-0.4% so far. The market retraces some of its yesterday's move down. Investors will wait for economic data announcements: Producer Price Index, Retail Sales at 8:30 a.m., Business Inventories at 10:00 a.m., Crude Oil Inventories number at 10:30 a.m. Will Friday's rally continue despite yesterday's volatility? If the index breaks above 2,800, it could accelerate the uptrend towards late January record high. However, we can see potential negative rising wedge pattern on the above S&P 500's daily chart. It still may be just an upward correction following January - February sell-off.

The S&P 500 futures contract trades within an intraday uptrend, as it retraces a part of its yesterday's move down. The market bounced off support level at around 2,760. On the other hand, resistance level remains at 2,790-2,800, marked by Monday - Tuesday short-term consolidation, along with double-top pattern. The futures contract fluctuates below this consolidation, as the 15-minute chart shows:

Nasdaq Off Record Highs - Just Correction?

The technology Nasdaq 100 futures contract was stronger than the broad stock market recently, as it broke above 7,000 mark and continued reaching new record highs. The market gained more than 1,000 points off its February 9 bottom, as it remarkably retraced all of its late January - early February sell-off in one month. The Nasdaq futures contract was above 7,200 mark yesterday, before reversing lower and retracing most of its Friday's rally. Then it fell closer to the level of 7,000 before bouncing off support level at around 7,050. On the other hand, resistance level remains at 7,150-7,200. The market trades below its short-term upward trend line, as we can see on the 15-minute chart:

Amazon and Apple - Downward Reversal?

Let's take a look at Apple, Inc. stock (AAPL) daily chart (chart courtesy of http://stockcharts.com) again. It was one of February stock market rout's main drivers. Then it led broad stock market rebound rally. It fell close to support level of $150 on February 9. Since then it was retracing early February losses. The market reached new record high yesterday, but then it reversed its intraday uptrend and closed below $180. We can see some negative medium-term technical divergences - the most common divergences are between asset’s price and some indicator based on it (for instance the index and RSI or MACD 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. There is also a negative candlestick chart pattern called "bearish engulfing". It consists of a smaller white candlestick followed by a black candlestick that "engulfs" the white one. Here is how it looks on the Apple stock chart:

Amazon.com, Inc. stock (AMZN) continued its uptrend yesterday, as it reached new record high above the price of $1,600. Then the stock reversed its upward course and closed below Monday's closing price. The stock continues to trade well above its end-of-year closing price of $1,167.5 following bouncing off its upward trend line more than a month ago. Yesterday's trading action was bearish, as the stock formed a similar to the above-mentioned bearish engulfing pattern. We can also see some negative technical divergences:

Dow Jones Back at 25,000 Again

The Dow Jones Industrial Average daily chart shows that blue-chip index remains relatively weaker than the broad stock market and much weaker than record-breaking technology stocks, as it still trades well below late February local high. The market got back to 25,000 mark yesterday, but will it act as a support level? In late February, there was a negative candlestick pattern called Dark Cloud Cover, a pattern in which the uptrend continues with a long white body, and the next day it reverses following higher open and closes below the mid-point between open and close prices of the previous day. It continues to act as a resistance level:

Concluding, the S&P 500 index lost 0.6% on Tuesday, after opening higher and bouncing off 2,800 mark. The rally failed to continue following negative political news release. Was this just quick profit-taking action or more meaningful downward reversal? It's hard to say. Stocks are likely to open higher today and retrace some of their yesterday's move down, but the outlook is bearish after yesterday's rout. It seems that the overall market risk is higher than in the late February when S&P 500 was trading at the same level.

The broad stock market was falling almost 12% off its late January record high on February 9 before an intraday reversal. It was a final panic selling ahead of short-term upward reversal, and the market found a support of its medium-term upward trend line, which was at 2,550. The S&P 500 index retraced its whole month-long January rally and fell the lowest since early October. Then it retraced more than 61.8% of this relatively quick and deep sell-off. So, medium-term picture is now quite neutral. 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. This sell-off set the negative tone for weeks or months to come, despite recent broad stock market rebound.

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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