Downward Reversal? Stocks Still Relatively Close To Their Recent Highs

Wednesday's trading session was bearish, as stocks retraced their Tuesday's advance. However, the market remained at its recent local lows. So is this a topping pattern or just a pause before another leg up?

The U.S. stock market indexes lost 0.5-0.9% on Wednesday, retracing their Tuesday's advance, as investors took some short-term profits off the table. The S&P500 Indexretraced more of its October-December downward correction of 20.2% on Monday, before reversing its intraday advance and getting back below the 2,800 level. The market continued to fluctuate close to the previous medium-term local highs. The Dow Jones Industrial Average lost 0.5% and the Nasdaq Composite lost 0.9% on Wednesday.

The nearest important resistance levelof the S&P 500 index remains at 2,800-2,820, marked by the medium-term local highs. On the other hand, the support level is at around 2,765-2,770, marked by the recent local lows. The support level is also at the previous daily gap up of 2,757.90-2,760.24.

The broad stock market retraced all of its December sell-off and it got close to the medium-term resistance level of around 2,800, marked by the October-November local highs. So is it still just a correction or a new medium-term uptrend? The market broke above the 61.8% Fibonacci retracement of the 20% decline. And we may see an attempt at getting back to the record highs. But will the index break above the mentioned previous local highs? There have been no confirmed negative signals so far:

Short-Term Downtrend or Still a Correction

Expectations before the opening of today's trading session are slightly negative, because the index futures contract trade 0.2% below their yesterday's closing prices. The European stock market indexes have lost 0.3-0.4% so far. Investors will wait for some economic data announcements today: Initial Claims, Revised Nonfarm Productivity at 8:30 a.m. The broad stock market will likely extend its short-term downward correction today. We may see some more uncertainty as the market remains close to the mentioned medium-term local highs.

The S&P 500 futures contract trades within an intraday consolidation, as it fluctuates following its yesterday's decline. The nearest important level of resistance is at around 2,780, marked by the recent local low. On the other hand, the support level is at 2,760-2,665, among others. The futures contact trades along its Monday's local low this morning, as the 15-minute chart shows:

Nasdaq Close to 7,100 Again

The technology Nasdaq 100 futures contract follows a similar path, as it trades within an intraday consolidation after getting back to the 7,050-7,100 support level. The market gained almost 1,400 points from December the 26th local low of around 5,820. The nearest important resistance level is now at around 7,100-7,150. The Nasdaq futures contract extends its short-term consolidation, as we can see on the 15-minute chart:

Apple, Amazon - Uncertainty Again

Let's take a look at the Apple, Inc. stock (AAPL) daily chart (chart courtesy of http://stockcharts.com). The stock broke above $175 on Monday, as it extended its recent advance. The market retraced some more of the November-December sell-off. But will it come back above $200? For now, it still looks like a medium-term upward correction:

Now let's take a look at the daily chart of Amazon.com, Inc. (AMZN). The market broke above its medium-term downward trend line on Monday. But will it continue higher? There is a relatively important resistance level of around $1,740-1,750, marked by the previous local high. Yesterday, we saw a decline after bouncing off the resistance level:

Dow Jones - Short-Term Downward Correction

The DJIA extended its short-term uptrend a week ago, but then it reversed lower. The blue-chip stocks' gauge fell below the 26,000 mark on Monday. For now, it looks like a downward correction. However, if the market breaks below the previous resistance level of 25,500, we could see more selling pressure:

Nikkei Also Lower

Let's take a look at the Japanese Nikkei 225 index. It accelerated the downtrend in late December, as it fell slightly below the level of 19,000. Since then it has been retracing the downtrend. Recently the market broke above its local highs and the 21,000 resistance level. Then it bounced off the resistance level of around 22,000 and retraced most of the recent advance:

The S&P 500 index slightly extended its recent run-up on Monday, before reversing lower and closing below the 2,800 level. It remains at the medium term resistance level. So is this a new medium-term uptrend or still just upward correction before another medium-term leg lower? The market trades above the 61.8% Fibonacci retracement of the whole medium-term decline. There have been no confirmed negative signals so far.

Concluding, the S&P 500 index will likely open slightly lower today. We may see some more short-term fluctuations along the mentioned medium-term resistance level. It still looks like a relatively flat correction within an uptrend.

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Paul Rejczak

Stock Trading Strategist

Sunshine Profits - Effective Investments through Diligence and Care

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