The U.S. stock market indexes gained 1.4-1.5% on Friday following bouncing off new short-term lows, as investors' sentiment improved in the second half of the trading session. The S&P 500 index fell the lowest since the early October. It traded 11.8% below its January 26 record high of 2,872.87 (-340.2 points). Both Dow Jones Industrial Average and the technology Nasdaq Composite gained 1.4% on Friday.
The nearest important level of resistance of the S&P 500 index is at around 2,540-2,560, marked by Friday's daily high, among others. The next resistance level is at 2,680-2,700, marked by last week's Wednesday-Thursday fluctuations. On the other hand, support level is at 2,580-2,600, marked by some recent local lows. The next level of support remains at 2,530-2,550, marked by Friday's daily low.
The index reached its record high two weeks ago on Friday, January 26. It broke below month-long upward trend line on Tuesday, January 30 following gap-down opening of the trading session, confirming uptrend's reversal. Then the market retraced all of its January rally and continued lower. The index extended its downtrend on Friday, as it fell almost 12% below its late January record high. We can see that stocks are sharply reversing their medium-term upward course following the whole retracement of last month's euphoria rally. However, the market bounced off its medium-term upward trend line on Friday, as the daily chart shows:
Positive Expectations Following Friday's Bounce
The index futures contracts are gaining 1.1% vs. their Friday's closing prices this morning. So, investors' expectations ahead of the opening of today's trading session are positive following Friday's intraday bounce. The European stock market indexes have gained 1.2-1.5% so far. Will the sentiment change before cash market opening at 9:30 a.m.? For now, it looks like the market may extend its Friday's bounce. It will probably retrace some more of its Thursday's move down. One thing's for sure, volatility will remain relatively high. There will be no new important economic announcements today. However, investors will wait for more quarterly corporate earnings releases.
The S&P 500 futures contract trades within an intraday uptrend following overnight consolidation, as investors' sentiment remains bullish after Friday's quick reversal off new short-term low. The market retraces some more of its Thursday's sell-off. It trades along the level of 2,650. The nearest important level of support is at 2,630, marked by local lows. The next support level is at 2,580-2,600. On the other hand, resistance level is at around 2,650, and the next level of resistance is at 2,690-2,700. The futures contract trades along its close resistance level of 2,650, as we can see on the 15-minute chart:
Nasdaq Also Higher
The technology Nasdaq 100 futures contract follows a similar path, as it retraces some more of its Thursday's sell-off this morning. The market has bounced more than 300 points off its Friday's intraday low below the level of 6,200. It shows how volatile are technology stocks right now. The nearest important level of resistance is at around 6,500, and the next resistance level remains at 6,600-6,620, marked by short-term local highs. On the other hand, support level is at 6,430-6,450, and the next level of support is at 6,400, among others. The Nasdaq futures contract broke above its short-term downward trend line, as the 15-minute chart shows:
Let's take a look at Apple, Inc. stock (AAPL) daily chart (chart courtesy of http://stockcharts.com). It was one of the recent stock market rout's main drivers. The stock reached new record high around three weeks ago, following short-term consolidation along the support level of $175. The market got closer to $180 mark, but it failed to continue higher. Consequently, the stock retraced its January advance and continued lower. It broke its losing streak on Tuesday, but failed to reverse the downtrend. It fell close to support level of $150 on Friday. Then, it bounced and closed positive. Is this an upward reversal? It looks like some upward correction, but the support level of $150-155 may be bulls' stronghold for some time:
Amazon.com, Inc. stock (AMZN) was relatively strong vs. the broad stock market recently. Despite an overall weakness, it was extending its month-long rally up until Friday a week ago and its new record high at around $1,500 mark. The stock continues to trade well above its end of year closing price of $1,167.5. AMZN bounced off its upward trend line on Friday, following downward correction below the price of $1300. Will it continue towards new record highs? Depends on what the whole stock market does in the near future, but this stock continues to act pretty bullish:
The Dow Jones Industrial Average daily chart shows that blue-chip index broke below its short-term consolidation a week ago on Friday. The price sharply accelerated its downtrend on Monday, as it broke below the level of 25,500 and continued towards 24,000 mark. There were some medium-term negative technical divergences - the most common divergences are between asset’s price and some indicator based on it (for instance the index and RSI based on the index). In this case, the divergence occurs when price forms a higher high and the indicator forms a lower high. It shows us that even though price reaches new highs, the fuel for the uptrend starts running low.
The DJIA broke below its three-month-long upward trend line and retraced most of the November-January rally. Is this a new downtrend or still just correction? Tuesday's bounce was a first positive signal for the blue-chip market. We saw positive bullish piercing candlestick chart pattern. It is a pattern where the price literally pierces up through the falling market. However, the index struggled at the nearest important resistance level of 25,000, and reversed its short-term move up. Consequently, it fell below 24,000 mark again, and continued below 23,500 on Friday. We can see some positive candlestick chart pattern again. The market formed a bullish harami on Friday. It is a pattern in which a large black candlestick is followed by a smaller white candlestick with body located within the body of a preceding day. However, that kind of a reversal pattern needs to be confirmed too:
Concluding, the S&P 500 index gained 1.5% on Friday after bouncing off new short-term low. The broad stock market was retracing almost 12% off its late January record high on Friday, before an intraday reversal. Was this some final panic selling ahead of major upward reversal? Tuesday-Wednesday's rally was just "dead cat bouncing" upward correction. On Friday, we wrote that the market may find some short-term support at around its medium-term upward trend line, which was at 2,550. It came true, as the index bounced off support along the level of 2,530-2,550. In the near future, we will probably see some short-term uncertainty. The market may fluctuate following recent sell-off. It may also retrace some more of its Wednesday-Friday's decline.
The broad stock market retraced its whole month-long January rally and continued lower, the lowest since early October. So, medium-term picture is now bearish. Investors took profits off the table following the unprecedented month-long rally, but then they began selling in panic. It was quite similar to 2010 Flash Crash event. Is this just downward correction or the beginning of a new medium-term downtrend? This sell-off set the negative tone for weeks or months to come.
The S&P 500 index traded around 7.5% above its December 29 yearly closing price on Friday January 26. This almost month-long rally seemed unprecedented. The legendary investor John Templeton once said that "bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria”. So, now it looks like it was an euphoria phase of the nine-year-long bull market. Did it die over a week ago? It's hard to say, but new record highs scenario seems very unlikely now.
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Paul Rejczak
Stock Trading Strategist
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