Volatility Following Recent Rally - Which Direction Is Next?

August 19, 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 now 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 US stock market indexes gained 0.1-0.2% on Wednesday, extending their short-term fluctuations, as investors reacted to the FOMC Minutes release, among others. The S&P 500 index remains close to its Monday's new record high of 2,193.81. The nearest important level of resistance is at around 2,190-2,200. On the other hand, support level is at 2,165-2,170, marked by short-term local lows. The next support level remains at 2,150. Will the market continue higher? Or is this some kind of a topping pattern before downward reversal? There have been no confirmed negative signals so far:

Expectations before the opening of today's trading session are virtually flat. The European stock market indexes have gained 0.1-0.5% so far. Investors will now wait for some economic data announcements: Initial Claims, Philadelphia Fed number at 8:30 a.m., Leading Indicators at 10:00 a.m. The S&P 500 futures contract trades within an intraday consolidation, following yesterday's rebound. The nearest important level of support is at around 2,165-2,170, marked by short-term local lows. On the other hand, resistance level remains at 2,180-2,190, as we can see on the 15-minute chart:

The technology Nasdaq 100 futures contract follows a similar path, as it currently trades close to the level of 4,800, following yesterday's move up off support level at around 4,770. The nearest important level of resistance is at around 4,810-4,820, marked by previous short-term support level, as the 15-minute chart shows:

Concluding, the broad stock market extended its short-term downtrend yesterday, before bouncing off support level. We still can see overbought conditions accompanied by negative technical divergences. 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&P500 index). You can trade S&P 500 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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