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Paul Rejczak

Paul Rejczak

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…

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Stock Trading Alert: Positive Expectations As Investors' Sentiment Improves - New Record Highs Ahead?

Stock Trading Alert originally published on February 9,  2017, 6:56 AM:


 

Briefly: In our opinion, speculative short positions are favored (with stop-loss at 2,330, and profit target at 2,150, S&P 500 index).

Our intraday outlook remains bearish, and our short-term outlook is bearish. Our medium-term outlook remains 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 were mixed between -0.2% and +0.2% on Wednesday, extending their short-term consolidation along record highs, as investors continued to hesitate following last week's Friday's rally. The S&P 500 index remains close to its January 26 all-time high of 2,300.99. It is also above its last week's Monday's daily gap down of 2,286.01-2,291.62. The Dow Jones Industrial Average is above 20,000 mark, and the technology Nasdaq Composite Index is close to the level of 5,700. Will the market extend its year-long medium-term uptrend even further before some more meaningful downward correction? The nearest important resistance level of the S&P 500 index is currently at around 2,300 marked by record high. On the other hand, level of support is at around 2,285-2,290, marked by Friday's daily gap up of 2,283.97-2,287.88. The next support level is at 2,260-2,270, among others. We can see some short-term volatility following November - January move up. Is this a topping pattern before downward reversal? The S&P 500 index still trades along medium-term upward trend line, as we can see on the daily chart:

S&P500 Daily Chart
Larger Image

Expectations before the opening of today's trading session are positive, with index futures currently up 0.2%. The European stock market have gained 0.3-0.9% so far. Investors will wait for more quarterly corporate earnings releases. They will also wait for some economic data announcements: Initial Claims at 8:30 a.m., Wholesale Inventories at 10:00 a.m. The market expects that the Wholesale Inventories grew 1.0% in December. The S&P 500 futures contract trades within an intraday uptrend, as it breaks above its short-term consolidation, following overnight fluctuations along the level of 2,290. The nearest important level of resistance is at around 2,300, marked by record high. On the other hand, support level is at around 2,280-2,285, and the next support level is at 2,260-2,270, marked by previous consolidation. The market is getting close to new all-time highs. The futures contract broke above its recent consolidation along the level of 2,270, as the 15-minute chart shows:

S&P500 15-Minute Chart
Larger Image

The technology Nasdaq 100 futures contract follows a similar path, as it currently trades within an intraday uptrend after an overnight consolidation. It reaches new all-time high above the level of 5,200. The technology sector stocks have been relatively stronger than the broad stock market recently following better-than-expected quarterly earnings releases. The nearest important support level is at 5,180-5,185, marked by previous level of resistance, and the next support level is at around 5,170, among others. There have been no confirmed negative signals so far. However, we can see short-term overbought conditions.

NASDAQ100 Futures 15-Minute Chart
Larger Image

Concluding, the broad stock market remained within its short-term consolidation on Wednesday, following last week's Friday's move up. Will the index continue higher today? Is this just a short-term consolidation after three-month long rally from Presidential Elections' local low in November of 2016? Or is this some topping pattern ahead of some more meaningful downward correction? Potential upside seems limited, and the S&P 500 index may retrace some of its November - January uptrend. It may even reverse its year-long uptrend, as investors' sentiment readings remain very bullish. We still can see 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 - daily opening price of the S&P 500 index). Stop-loss level remains at 2,330 and potential profit target is at 2,150 (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.

To summarize: short position in S&P 500 index is justified from the risk/reward perspective with the following entry prices, stop-loss orders and profit target price levels:

S&P 500 index - short position: profit target level: 2,150; stop-loss level: 2,330
S&P 500 futures contract (March 2017) - short position: profit target level: 2,145; stop-loss level: 2,325
SPY ETF (SPDR S&P 500, 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).

Thank you.

 

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