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Paul Rejczak

Paul Rejczak

Writer, Sunshine Profits

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: Short-Term Uncertainty As Stocks Fluctuate Along New Record High

Stock Trading Alert originally published on February 27,  2017, 6:54 AM:


 

Briefly: In our opinion, speculative short positions are favored (with stop-loss at 2,410, and profit target at 2,200, S&P 500 index).

Our intraday outlook is now 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 main U.S. stock market indexes gained between 0.1% and 0.2% on Friday, following relatively volatile trading session, as investors' sentiment remained bullish despite global stock markets weakness. The S&P 500 index got close to its Thursday's new record high of 2,368.26, after bouncing off support level at around 2,350-2,355, marked by last Tuesday's daily gap up of 2,351.16-2,354.91. The Dow Jones Industrial Average closed above the level of 20,800, and the technology Nasdaq Composite index gained 0.2%, as it got closer to recent record high. All three major indexes trade along their all-time highs. Will the market extend its year-long medium-term uptrend even further before some more meaningful downward correction? The next important level of support of the S&P 500 index is at around 2,320, marked by previous daily gap up of 2,319.23-2,321.42. The support level is also at around 2,300-2,310, marked by previous level of resistance and the early February daily gap up of 2,311.08-2,311.10. We can see some short-term volatility following three-month-long rally off last year's November low at around 2,100. Is this a topping pattern before downward reversal? The uptrend accelerated, and it looked like a blow-off top pattern accompanied by some buying frenzy. The S&P 500 index trades above its 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 virtually flat, with index futures currently between -0.1% and 0.0%, as investors take some short-term profits off the table. The European stock market indexes have been mixed so far. Investors will now wait for some economic data announcements: Durable Orders at 8:30 a.m., Pending Home Sales at 10:00 a.m. The market expects that Durable Orders grew 1.8%, and Durable Orders -ex transportation number grew 0.5% in January. The S&P 500 futures contract trades within an intraday downtrend, as it retraces its overnight advance. The nearest important level of resistance is at 2,365, marked by new record high. On the other hand, support level is at around 2,350-2,355, marked by recent fluctuations. The next support level is at 2,335-2,340, marked by some previous local lows. There have been no confirmed negative signals so far. However, we can see short-term overbought conditions, along with negative technical divergences. Is this a topping pattern or just some short-term consolidation before another leg up?

S&P500 15-Minute Chart
Larger Image

The technology Nasdaq 100 futures contract follows a similar path, as it currently trades within an intraday downtrend. The technology sector stocks were relatively stronger than the broad stock market on Friday. However, the market hasn't reached new all-time high recently. The nearest important support level is at around 5,280-5,300, marked by previous level of resistance. On the other hand, resistance level is at 5,350, marked by local high. The futures contract trades within a short-term consolidation, as the 15-minute chart shows:

NASDAQ100 Futures 15-Minute Chart
Larger Image

Concluding, the broad stock market remained within a short-term consolidation on Friday, as the S&P 500 index continued to trade along its new all-time high. Will the uptrend continue despite some clear short-term overbought conditions? Or is this a topping pattern before downward correction?

Our speculative short position from December 14 has been closed a week ago on Tuesday, at the stop-loss level of 2,330 (S&P 500 index). We lost 61.65 index points on that trade, betting against year-long medium-term uptrend off last year's February local low. 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.

There have been no confirmed negative signals so far. However, we still can see medium-term overbought conditions accompanied by negative technical divergences. Therefore, we continue to maintain our speculative short position (opened on Wednesday, February 15 at 2,335.58 - opening price of the S&P 500 index). Stop-loss level is at 2,410 and potential profit target is at 2,200 (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: 2,200; stop-loss level: 2,410
S&P 500 futures contract (March) - short position: profit target level: 2,197; stop-loss level: 2,407
SPY ETF (SPDR S&P 500, not leveraged) - short position: profit target level: $220; stop-loss level: $241
SDS ETF (ProShares UltraShort S&P500, leveraged: -2x) - long position: profit target level: $15.47; stop-loss level: $12.98

Thank you.

 

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