Stocks Broke Below Their Two Month Long Consolidation - New Downtrend?

September 12, 2016

In our opinion, speculative short positions are favored (with stop-loss at 2,210, and profit target at 2,050, S&P 500 index).

Our intraday outlook is bearish, and our short-term outlook is bearish. Our medium-term outlook is now 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 U.S. stock market indexes lost 2.1-2.6% on Friday, breaking below their two-month-long consolidation, as investors' sentiment worsened following Fed rate hike fears, among others. The S&P 500 index broke below support level of 2,150-2,160, marked by previous local lows. It got back slightly below its last year's high at around 2,135. The nearest important level of resistance is at 2,150, marked by recent support level. On the other hand, potential level of support is at 2.100-2,120, marked by some previous local highs. Is this a new medium-term downtrend, or just quick downward correction within an over half-year long uptrend?

Expectations before the opening of today's trading session are negative, with index futures currently down 0.6-0.8%. The European stock market indexes have lost 1.4-2.0% so far. The S&P 500 futures contract trades within an intraday downtrend, as it continues its Friday's decline. The nearest important level of resistance is at around 2,125, marked by Friday's daily low. On the other hand, support level is at 2,100 mark. There have been no confirmed positive signals so far. However, we can see some short-term overbought conditions:

The technology Nasdaq 100 futures contract follows a similar path, as it extends its last week's sell-off. The nearest important resistance level is at around 4,670-4,680. On the other hand, support level is at 4,600-4,620, among others. There have been no confirmed short-term positive signal so far:

Concluding, the broad stock market broke below its two-month-long consolidation on Friday, as the S&P 500 index got back below its last year's high of 2,135. We continue to maintain our already profitable 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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