S&P500: Downward Reversal Or Just Correction?

Wednesday’s trading session was bearish, as investors reacted to the FOMC Rate Decision release. However, the S&P 500 index has managed to reach yet another new record high of 2,954.13, before reversing and closing 0.8% lower. Was it a downward reversal or just some quick profit-taking action?

The U.S. stock market indexes lost 0.6-0.8% on Wednesday, as investors reacted to the Fed’s Statement release at 2:00 p.m. The S&P 500 index retraced all of its medium-term downward correction of 20.2% recently and yesterday it reached another new record high of 2,954.13. Both the Dow Jones Industrial Average and the Nasdaq Composite lost 0.6% on Wednesday.

The nearest important resistance level of the S&P 500 index is at around 2,950-2,955, marked by the new record high. The next resistance level is at 3,000. On the other hand, the support level is at 2,915-2,920, marked by the recent resistance level. The support level is also at 2,900.

The broad stock market retraced all of its December sell-off and it broke above the last year’s high. There have been no confirmed negative medium-term signals so far. However, the index continues to trade along its last year’s high, as we can see on the daily chart:

Positive Expectations, More Short-Term Fluctuations?

Expectations before the opening of today's trading session are slightly positive, because the index futures contracts trade 0.1-0.3% above their yesterday’s closing prices. The European stock market indexes have been mixed so far. Investors will wait for some economic data announcements today: Nonfarm Productivity, Unemployment Claims at 8:30 a.m., Factory Orders at 10:00 a.m. Stocks will likely extend their short-term consolidation. For now, it looks like a relatively flat correction within a medium-term uptrend.

The S&P 500 futures contract trades within an intraday consolidation following overnight advance. The nearest important level of resistance is at around 2,935-2,940. On the other hand, the support level is at 2,915-2,920, marked by the local low. The futures contract is close to the previous week’s local lows, as the 15-minute chart shows:

Nasdaq Slightly Below 7,800

The technology Nasdaq 100 futures contract retraces some of its yesterday’s intraday sell-off this morning, as it trades closer to the 7,800 mark. On the other hand, the nearest important support level is at 7,700-7,750. The Nasdaq futures contract trades within an over-week-long consolidation, as we can see on the 15-minute chart:

Apple’s Reversal?

Let's take a look at the Apple, Inc. stock (AAPL) daily chart (chart courtesy of http://stockcharts.com). The stock gained almost 5% on Wednesday, following Tuesday’s quarterly earnings release. The price got back above the broken medium-term upward trend line again. However, yesterday’s intraday trading action was quite bearish. The resistance level remains at around $215:

Now let's take a look at the daily chart of Microsoft Corp. (MSFT). The stock accelerated its uptrend last week, as it reached the new record high of $131.37. Investors reacted to a better-than-expected quarterly earnings release. For now, it looks like a blow-off topping pattern. We can see some clear technical overbought conditions:

Dow Jones Also Lower

The Dow Jones Industrial Average remains relatively weaker than the broad stock market. The resistance level is at around 26,800-27,000, marked by the last year’s topping pattern and the record high of 26,951.8. Last week the blue-chip stocks’ gauge reached the new medium-term high. But then it traded closer to the 26,500 mark again. There have been no confirmed negative signals so far. However, we can see some negative technical divergences:

The S&P 500 index has reached the new record high yesterday after breaking above the recent local highs earlier in the week. The broad stock market extended its medium-term uptrend, as investors’ sentiment remained very bullish following economic data, quarterly corporate earnings releases. However, yesterday’s bearish intraday trading action may lead to some consolidation or a downward correction.

Concluding, the S&P 500 index will likely open slightly higher today and it may retrace some of yesterday’s decline. Investors will now wait for tomorrow’s monthly jobs data release.

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Paul Rejczak

Stock Trading Strategist

Sunshine Profits - Effective Investments through Diligence and Care

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