Negative Expectations, But Will Market Break Below Short-Term Consolidation?

April 13, 2017

In our opinion, speculative short positions are favored (with stop-loss at 2,410, and profit target at 2,200, S&P 500 index).

Our intraday outlook is bearish, and our short-term outlook is bearish. Our medium-term outlook remains neutral, following S&P 500 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 lost 0.3-0.4% on Wednesday, extending their fluctuations along short-term local lows, as investors reacted to economic data releases, global politics news. The S&P 500 index continues to trade within its few-week-long consolidation, as it remains close to 2,350 mark. The index is around 2% below March 1 all-time high of 2,400.98. Is this a new downtrend or just relatively shallow downward correction before another medium-term leg up? The Dow Jones Industrial Average closed below 20,600 mark, and technology Nasdaq Composite index fell closer to 5,800 mark, following its last week's Wednesday's move to new record high. The nearest important level of support of the S&P 500 index is at around 2,335-2,340, marked by some previous local lows, including Tuesday's daily low of 2,337.25. The support level is also at 2,320, marked by February 13 daily gap up of 2,319.23-2,321.42, among others. On the other hand, the nearest important level of resistance is now at 2,365-2,370, marked by short-term local highs. The next resistance level is at 2,380-2,400, marked by all-time high, among others. We can see some short-term volatility following five-month-long rally off last year's November low at around 2,100. Is this a topping pattern before medium-term downward reversal? The uptrend accelerated on March 1 and it looked like a blow-off top pattern accompanied by some buying frenzy. The S&P 500 index continues to trade along its medium-term upward trend line, as we can see on the daily chart:

Expectations before the opening of today's trading session are negative, with index futures currently down 0.2-0.3%. The European stock market indexes have lost 0.3-0.6% so far. Investors will now wait for some economic data announcements: Initial Claims, Producer Price Index at 8:30 a.m., Michigan Sentiment at 10:00 a.m. The market expects that Producer Price inflation was unchanged in March, and its core number grew by 0.2%, Initial Claims were at 251,000 last week, and Michigan Sentiment was at 96.3 in April. The S&P 500 futures contract trades within an intraday downtrend following an overnight rebound. The nearest important support level is at 2,330-2,335, marked by local lows. The next level of support is at around 2,300-2,320, marked by previous local low. On the other hand, the nearest important level of resistance is at around 2,345, marked by short-term local high. The next resistance level is at 2,355-2,360, marked by late last week's local highs. The resistance level is also at 2,370-2,375, marked by last week's local high. The market continues to trade within a short-term consolidation. Is this some medium-term topping pattern or just flat correction before another leg higher?

The technology Nasdaq 100 futures contract follows a similar path, as it currently trades within an intraday downtrend after an overnight rebound off support level at 5,360. The next support level is at around 5,350, among others. It reached new all-time high above the level of 5,480 a week ago. For now, it looks like another downward correction within an uptrend. The nearest important level of resistance is at around 5,380-5,400, marked by recent support level. The next resistance level is at 5,420-5,440, marked by short-term consolidation, as the 15-minute chart shows:

Concluding, the S&P 500 index extended its short-term consolidation on Wednesday, as it remained slightly below the level of 2,350. Is this a new downtrend or just another quick downward correction? The broad stock market fluctuates following its late March rebound off support level at around 2,320. It remains close to its five-month-long medium-term upward trend line. There have been no confirmed short-term positive signals so far. However, we still can see medium-term overbought conditions along with negative technical divergences. Therefore, we continue to maintain our speculative short position (opened on February 15 at 2,335.58 - opening price of the S&P 500 index). Stop-loss level is at 2,410 and potential profit target is at 2,200 (S&P 500 index). You 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: 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:

S&P 500 index - short position: profit target level: 2,200; stop-loss level: 2,410

S&P 500 futures contract (June) - short position: profit target level: 2,197; stop-loss level: 2,407

SPY ETF (SPDR S&P 500, not leveraged) - short position: profit target level: $220; stop-loss level: $241

SDS ETF (ProShares UltraShort S&P500, leveraged: -2x) - long position: profit target level: $15.47; stop-loss level: $12.98

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.

The symbol for silver ‘AG’ comes from the Latin word ‘agentum’ meaning silver.