Stocks Bounced, but Bulls Are Not Out of the Woods Yet

Stocks bounced from the new local low on Friday. Is this the end of a downward correction or just some consolidation before another leg down?

The S&P 500 index slightly extended its short-term downtrend on Friday, as it reached the local low of 4,288.52 right after the opening. But bulls took over and the market gained 1.15% on a daily basis. It came back above 4,350. This morning the market is expected to open slightly lower and we may see more short-term consolidation.

The nearest important support level of the broad stock market index is now at 4,300-4,320, marked by the recent local lows. The next support level is at around 4,250. On the other hand, the resistance level is at 4,380-4,400. The S&P 500 continues to trade below its month-long downward trend line, as we can see on the daily chart (chart by courtesy of http://stockcharts.com):

Dow Jones Didn’t Reach a New Low

Let’s take a look at the Dow Jones Industrial Average chart. In early September the blue-chip index broke below a two-month-long rising wedge downward reversal pattern. Last week it got back closer to its mid-September local low. However, unlike the broad stock market’s gauge, it managed to stay above that support level. The nearest important resistance level is at around 34,500, as we can see on the daily chart:

Apple is Still at Support Level

Apple stock weighs around 6.1% in the S&P 500 index, so it is important for the whole broad stock market picture. Since early September it has been declining from the record high. Recently the stock sold off to the previous local lows and on Friday it sold off to around $139 before going back up. The $142 price level is acting as a support level, so it is still a “make or break” situation.

We Closed Our Profitable Short Position on Friday

Let’s take a look at the hourly chart of the S&P 500 futures contract. We opened a short position on August 12 at the level of 4,435 and closed it on Friday at the level of 4,315 with a gain of 120 points because the risk/reward perspective seemed less favorable (chart by courtesy of http://tradingview.com):

Conclusion

Last week the broad stock market got back to its mid-September local low and the S&P 500 index fell briefly below 4,300 level. Then we’ve witnessed a short-covering rally. Most likely it was just an upward correction within a downtrend. There have been no confirmed positive signals so far. However, the risk/reward perspective seems less favorable right now and no positions are currently justified.

Here’s the breakdown:

• The S&P 500 bounced from 4,300 support level on Friday, but for now it looks like a short-term upward correction.
• Our speculative short position has been closed right before the opening of Friday’s cash market’s trading session.
• However, we are still expecting more downward pressure and a correction to 4,200-4,250 level.

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Thank you.

Paul Rejczak,
Stock Trading Strategist
Sunshine Profits: Effective Investments through Diligence and Care

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The information above represents analyses and opinions of Paul Rejczak & Sunshine Profits' associates only. As such, it may prove wrong and be subject to change without notice. At the time of writing, we base our opinions and analyses on facts and data sourced from respective essays and their authors. Although formed on top of careful research and reputably accurate sources, Paul Rejczak and his associates cannot guarantee the reported data's accuracy and thoroughness. The opinions published above neither recommend nor offer any securities transaction. Mr. Rejczak is not a Registered Securities Advisor. By reading his reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Paul Rejczak, Sunshine Profits' employees, affiliates as well as their family members may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

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