Friday's trading session was very bullish, as the main U.S. stock market indexes gained 1.7-1.8%. Investors' sentiment improved following better-than-expected monthly Nonfarm Payrolls release. The S&P 500 index broke above its short-term consolidation and it got close to the late February local high of 2,789.15. The index currently trades 3.0% below January 26 record high of 2,872.87. Both Dow Jones Industrial Average and the technology Nasdaq Composite gained 1.8% on Friday. The latter reached new record high, as it broke above 7,500 mark again.
The nearest important level of resistance of the S&P 500 index is at 2,790-2,800, marked by the above-mentioned previous local high. The next possible level of resistance is at 2,830-2,840, marked by some late January local highs. On the other hand, support level is now at 2,740-2,750, marked by Friday's daily gap up of 2,740.45-2,751.54. The next level of support remains at 2,700-2,720, among others.
The S&P 500 index reached its record high on January 26. It broke below month-long upward trend line, as it confirmed uptrend's reversal. Then the broad stock market gauge retraced all of its January rally and continued lower. The index extended its downtrend on February 9, as it was almost 12% below the late January record high. We can see that stocks reversed their medium-term upward course following whole retracement of January euphoria rally. Then the market bounced off its almost year-long medium-term upward trend line, and it retraced more than 61.8% of the sell-off within a few days of trading. Is this just an upward correction or uptrend leading to new all-time highs? The market seems to be in the middle of two possible future scenarios. The bearish case leads us to February low or lower after breaking below medium-term upward trend line, and the bullish one means potential double top pattern or breakout above the late January high. Friday's trading session made the bullish case much more likely:
Positive Expectations Again
Expectations before the opening of today's trading session are bullish again, because the index futures contracts trade 0.3-0.5% higher vs. their Friday's closing prices right now. However, the main European stock market indexes have been mixed so far. Will Friday's rally continue today? The market may extend its short-term uptrend, but some profit-taking action seems more likely than on Friday. There will be no new important economic announcements today.
The S&P 500 futures contract trades within an intraday consolidation after Friday's rally. It is fluctuating along the level of 2,800. The market is now above its late February local high of around 2,790, as the futures contract trades higher than the S&P 500 index following series roll-over. The nearest important level of resistance is at around 2,805, marked by local high. The next resistance level is at 2,810-2,810, marked by some previous fluctuations. On the other hand, support level remains at 2,790-2,795, marked by short-term local lows. The support level is also at around 2,780. The futures contract is trading close to 2,800 mark, as the 15-minute chart shows:
Nasdaq at New Record High
The technology Nasdaq 100 futures contract is relatively stronger than the broad stock market, as it currently trades along new record high following Friday's breakout above 7,100 mark. It gained around 1,000 points off its February 9 bottom, as it remarkably retraced all of its late January - early February sell-off in one month. Topping euphoria run? Or just another leg higher within multi-year bull market? We will wait and see if this breakout holds - if the market stays above its previous local high of 7,050. The nearest important level of support is at around 7,100-7,120, marked by Friday's move up, and the next level of support is at 7,000-7,050. On the other hand, potential resistance level is at 7,200. The Nasdaq futures contract trades much above its short-term upward trend line, as we can see on the 15-minute chart:
Amazon Continues Higher While Apple Lags
Let's take a look at Apple, Inc. stock (AAPL) daily chart (chart courtesy of http://stockcharts.com). It was one of February stock market rout's main drivers. Then it led broad stock market rebound rally. It fell close to support level of $150 on February 9. Since then it was retracing its early February losses. The market reached new record high two weeks ago, as it was trading slightly above $180 mark. Then it retraced some of its short-term uptrend, but it got closer to record high again on Friday. Will it reach new record high soon? It may continue higher, but we see some negative medium-term technical divergences - the most common divergences are between asset’s price and some indicator based on it (for instance the index and RSI or MACD 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:
Amazon.com, Inc. stock (AMZN) continues its upward march, as it reaches new record highs and gets closer to the price of $1,600. The stock continues to trade well above its end-of-year closing price of $1,167.5. AMZN bounced off its upward trend line a month ago following downward correction below the price of $1,300. There have been no confirmed negative signals so far. There are still some negative technical divergences along with overbought conditions, but the stock remains remarkably stronger than the broad stock market:
Dow Jones Breaks Higher, but Remains Relatively Weaker
The Dow Jones Industrial Average daily chart shows that blue-chip index broke above its short-term consolidation on Friday, and it retraced some of its recent move down. However, it remains relatively weaker than the broad stock market and much weaker than technology stocks. Will it break above its late February local high of 25,800? There was a negative candlestick pattern called Dark Cloud Cover, a pattern in which the uptrend continues with a long white body, and the next day it reverses following higher open and closes below the mid-point between open and close prices of the previous day. It act as a resistance level right now:
Concluding, the S&P 500 index broke above its short-term consolidation on Friday, as investors reacted to better-than-expected economic data releases. The broad stock market gauge gained 1.7% and it got closer to its late February local high of 2,789.15. The index futures point to a higher opening of the trading session today, so the market may break above 2,800 mark. But will it continue retracing its late January - early February sell-off? Technology stocks drive the whole stock market higher, but we can see short-term overbought conditions along with negative technical divergences. It seems that the overall market risk is higher than in the late February when S&P 500 was trading at the same level.
The broad stock market was falling almost 12% off its late January record high on February 9 before an intraday reversal. It was a final panic selling ahead of short-term upward reversal, and the market found a support of its medium-term upward trend line, which was at 2,550. The S&P 500 index retraced its whole month-long January rally and fell the lowest since early October. Then it retraced more than 61.8% of this relatively quick and deep sell-off. So, medium-term picture is now quite neutral. 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. This sell-off set the negative tone for weeks or months to come, despite recent broad stock market rebound.
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Paul Rejczak
Stock Trading Strategist
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