S&P500 Gets Close To Record High As Investors' Sentiment Improves

January 5, 2017

In our opinion speculative short positions are favored (with stop-loss at 2,330, and profit target at 2,150 on S&P500 index).

Our intraday outlook remains bearish, and our short-term outlook is bearish. Our medium-term outlook remains 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 US stock market indexes gained between 0.3% and 0.6% on Wednesday, extending their short-term uptrend, as investors' sentiment remained bullish following Tuesday's rally. The S&P500 index continues to trade relatively close

to its December 13 all-time high of 2,277.53. For now, it looks like a flat correction within an uptrend off last year's early November low. But will the market extend its year-long uptrend even further before some more meaningful downward correction? The nearest important level of resistance remains at around 2,280, marked by record high, and the next resistance level is at 2,300 mark. On the other hand, support level is at 2,250, marked by recent resistance level. The next support level remains at 2,200-2,220. The index continues to trade along its medium-term upward trend line. It also trades within a few-week-long consolidation, as the daily chart shows:

Expectations before the opening of today's trading session are virtually flat, following yesterday's move up. The index futures are currently down 0.1%. The European stock market indexes have been mixed so far. Investors will now wait for some economic data announcements: ADP Employment Change at 8:15 a.m., Initial Claims at 8:30 a.m., ISM Services number at 10:00 a.m. The ADP Employment Change report is a measure of the change in non-farm, private employment. It is a relatively important announcement ahead of tomorrow's monthly jobs data release from the U.S. Bureau of Labor Statistics. The S&P500 futures contract trades within an intraday consolidation, as investors take some short-term profits off the table following this week's advance. It continues to trade above Friday's local highs along the level of 2,250. The next important level of resistance is at around 2,270-2,280, marked by previous consolidation along record highs. On the other hand, support level is at 2,250-2,255, marked by yesterday's consolidation, among others. The next support level is at around 2,240, marked by recent local low. For now, it looks like a flat correction within a short-term uptrend. However, the market remains below the resistance level marked by December consolidation. Will it break above its record highs?

The technology Nasdaq 100 futures contract follows a similar path, as it currently trades within an intraday consolidation. The market has retraced its Friday's sell-off following a bounce off support level at around 4,850. The nearest important level of resistance is at around 4,920-4,940, marked by local highs, and the next resistance level is at 5,000 mark. For now, it looks like an upward correction within a short-term downtrend. Will the technology Nasdaq 100 futures contract resume its medium-term uptrend and break above round resistance level of 5,000? The technology stocks continue to fluctuate following November - December rally, as we can see on the 15-minute chart:

Concluding, the broad stock market retraced its late December decline over the past two days, as investors' sentiment improved sharply following global stock markets rally. Is this a new short-term uptrend or just upward correction? The S&P500 index got back to its December trading range, marked by record high of 2,277.53. We still can see some medium-term overbought conditions accompanied by negative technical divergences. Therefore, we continue to maintain our speculative short position (opened on December 14 at 2,268.35 - opening price of the S&P500 index). Stop-loss level remains at 2,330 and potential profit target is at 2,150 (S&P500 index). You can trade S&P500 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&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.

To summarize: short position in S&P500 index is justified from the risk/reward perspective with the following entry prices, stop-loss orders and profit target price levels:

S&P500 index - short position: profit target level: 2,150; stop-loss level: 2,330

S&P500 futures contract (March 2017) - short position: profit target level: 2,145; stop-loss level: 2,325

SPY ETF (SPDR S&P500, not leveraged) - short position: profit target level: $214; stop-loss level: $232

SDS ETF (ProShares UltraShort S&P500, leveraged: -2x) - long position: profit target level: $16.35; stop-loss level: $14.00 (calculated using trade's opening price on Dec 14 at $14.78).

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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