New Short-Term Downtrend Or Just Quick Correction?

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&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 main US stock market indexes lost 0.6-0.8% on Wednesday, breaking below their recent consolidation, as investors took profits off the table following November - December rally. The S&P500 index remains close to its nearest important support level of 2,250. The next important support level is at 2,200-2,220. On the other hand, resistance level is at around 2,275-2,280, marked by December 13th record high of 2,277.53. The market continues to trade along its medium-term upward trend line. Is this a topping pattern or just flat correction before another leg up? There have been no confirmed negative signals so far. However, we can see technical overbought conditions along with some negative divergences:

Expectations before the opening of today's trading session are virtually flat. The European stock market indexes have lost 0.1-0.3% so far. Investors will now wait for the Initial Claims number release at 8:30 a.m. The S&P500 futures contract trades within an intraday consolidation following yesterday's move down. The nearest important resistance level is at around 2,250, and the next level of resistance is at 2,265-2,270, marked by previous consolidation, along with some local highs. On the other hand, support level is at 2,220-2,230. For now, it looks like a flat correction within a short-term downtrend. The market is below its recent trading range, as we can see on the 15-minute chart:

The technology Nasdaq 100 futures contract follows a similar path, as it currently trades within an intraday consolidation along the level of 4,920. The nearest important support level is at 4,900. On the other hand, resistance level is at 4,930-4,950, marked by previous level of support, as the 15-minute chart shows:

Concluding, the broad stock market broke below its short-term consolidation yesterday, as investors took profits off the table. However, the S&P 500 index remains close to 2,250 mark, while continuing to trade along its medium-term upward trend line. We still can see technical overbought conditions. Therefore, we continue to maintain our speculative short position (opened on December 14 at 2,268.35 - opening price of the S&P 500 index). Stop-loss level is 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).