New Downtrend Or Just Downward Correction Before Another Leg Higher?

September 26, 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, and our short-term outlook is bearish. Our medium-term outlook is 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 0.6-0.7% on Friday, retracing some of their recent advance, as investors took short-term profits off the table. The S&P 500 index remains relatively close to its all-time high of 2,193.81. The nearest important level of resistance is at around 2,170, marked by the daily gap down of 2,169.08-2,177.49. The next important level of resistance is at around 2,185-2,195, marked by all-time high, among others. On the other hand, support level is at around 2,150, marked by previous level of resistance. The next important support level is at 2,120. The market trades within a downward correction following recent rally. Will it continue its uptrend? Or is this some kind of a topping pattern before downward reversal?

Expectations before the opening of today's trading session are negative, with index futures currently down 0.5%. The European stock market indexes have lost 1.2-1.5% so far. Investors will now wait for the New Home Sales number release at 10:00 a.m. The S&P 500 futures contract trades within an intraday downtrend, as it extends its Friday's decline. The nearest important resistance level is at around 2,150-2,160, marked by previous level of support. On the other hand, potential support level is at 2,120-2,130, among others, as we can see on the 15-minute chart:

The technology Nasdaq 100 futures contract is relatively stronger than the broad stock market, as it remains closer to last week's new all-time high. The nearest important support level is at around 4,800-4,820, marked by previous level of resistance. The nearest important resistance level is at 4,750-4,860, among others. For now, it looks like a downward correction following recent move up:

Concluding, the broad stock market retraced some of its recent move up on Friday, as the S&P 500 index bounced off resistance level. There have been no confirmed negative signals so far. However, we continue to maintain our speculative short position (opened on July 18th at 2,162, S&P 500 index). Stop-loss level is at 2,210 and potential profit target is at 2,050 (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.

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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