Negative Expectations Following Tuesday's Decline - New Downtrend Or Just Consolidation?

October 13, 2016

In our opinion speculative short positions are favored (with stop-loss at 2,210, and profit target at 2,050, S&P500 index).

Our intraday outlook is bearish as is our short-term outlook. Our medium-term outlook is neutral, following S&P500 index breakout above last year's all-time high:

Intraday outlook (next 24 hours): bearish

Short-term outlook (next 1-2 weeks): bearish

Medium-term outlook (next 1-3 months): neutral

Long-term outlook (next year): neutral

The main U.S. stock market indexes were mixed between -0.1% and +0.1% on Wednesday, as investors hesitated following Tuesday's decline. The S&P 500 index is the lowest since half of September. Is this a new downtrend or just more consolidation following June - July rally? The nearest important level of resistance is at around 2,140-2,150, marked by previous support level. The next resistance level is at 2,170, among others. On the other hand, support level is at around 2,120, marked by September local low. The market trades along medium-term upward trend line, as the daily chart shows:

Expectations before the opening of today's trading session are negative, with index futures currently down 0.5-0.6%. The European stock market indexes have lost 0.7-1.3% so far. Investors will now wait for the Initial Claims number release at 8:30 a.m. The S&P500 futures contract trades within an intraday downtrend, as it extends its recent move down. The nearest important level of support is at around 2,100-2,110. On the other hand, resistance level remains at 2,130-2,140, marked by short-term consolidation, as we can see on the 15-minute chart:

The technology Nasdaq 100 futures contract follows a similar path, as it extends its recent sell-off. The nearest important level of resistance is at around 4,800-4,820, marked by previous support level. On the other hand, support level is at 4,750-4,770, marked by some previous consolidation.

Concluding, the broad stock market fluctuated yesterday, following its recent decline. For now, it looks like a flat correction within a short-term downtrend. Therefore, we continue to maintain our speculative short position (opened on July 18th at 2,162, S&P500 index). Stop-loss level is at 2,210 and potential profit target is at 2,050 (S&P 500 index). You can trade S&P500 index using futures contracts (S&P500 futures contract - SP, E-mini S&P500 futures contract - ES) or an ETF like the SPDR S&P500 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.

Paul Rejczak is a stock market strategist, who has been known for quality of his technical and fundamental analysis since the late nineties. He is interested in forecasting market behavior based on both traditional and innovative methods of technical analysis. Paul has made his name by developing mechanical trading systems. Paul is the author of Sunshine Profits’ premium service for stock traders: Stock Trading Alerts.

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