Friday's Bounce Gave Stock Market Bulls Some Hope, Stocks at a Crossroads, or a Cliff?

By: Paul_Rejczak

Friday's trading session brought an intraday rebound of the main U.S. stock market indexes. They opened lower and continued short-term downtrend before bouncing off and closing between -0.3% and +1.1% vs. their Thursday's closing prices. Was this a final sell-off within a downtrend from Tuesday's local high? The broad stock market may have found at least some temporary bottom, but will it continue upwards or just go sideways?

The main U.S. stock market indexes were mixed between -0.3% and +1.1% vs. their Thursday's closing prices on Friday, following lower opening of the trading session and an intraday bounce off support levels. The S&P 500 index closed 0.5% higher, and it is currently trading 6.3% below January 26 record high of 2,872.87. The Dow Jones Industrial Average lost 0.3%, as it was relatively weaker than the broad stock market again and the technology Nasdaq Composite gained 1.1% on Friday.

The nearest important level of resistance of the S&P 500 index is at around 2,700, marked by previous consolidation. The next resistance level remains at 2,750, marked by short-term local highs. On the other hand, support level remains at 2,740-2,750, marked by local low. On Friday we wrote: "If the market continues lower, potential level of support would be at 2,640-2,650, marked by previous short-term consolidation". The index did bounce off that support level, as it set its Friday's daily low at 2,647.32.

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. Last week's move down made the bearish case more likely. However, the most likely scenario may be that stocks go sideways for a while:

Mixed Expectations

The index futures contracts trade between -0.2% and +0.1% vs. their Friday's closing prices, so investors' expectations before today's cash market open are virtually flat. However, the market bounced off its overnight lows. The European stock market indexes have gained 0.2-0.5% so far. Investors will now wait for the ISM Non-Manufacturing PMI number release at 9:45 a.m., It looks like stocks may trade within a short-term consolidation this morning. Is this some bottoming pattern or just consolidation before another leg lower? It's hard to say, but the market keeps bouncing off the support level at around 2,650.

The S&P 500 futures contract is within an intraday uptrend, as it retraces its overnight move down. The nearest important level of resistance is at 2,690-2,700, marked by local highs. On the other hand, support level remains at 2,645-2,650, among others. The futures contract trades at its short-term downward trend line, as we can see on the 15-minute chart:

Nasdaq Bounces to 6,800 Mark

The technology Nasdaq 100 futures contract follows a similar path, as it retraces some of its Friday's sell-off and today's overnight decline. The market retraced more of its recent rally last week. A rally that retraced most of its severe late January - early February decline. Is this a new downtrend or just downward correction following the rally? One thing is for sure, volatility is much higher than months ago. The nearest important level of support is at around 6,650-6,700, and resistance level is at 6,850-6,900, marked previous fluctuations. The Nasdaq futures contract trades along the level of 6,800, as the 15-minute chart shows:

Apple and Amazon Below Their Record Highs

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. 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 on Wednesday, as it was trading above $180 mark again. Then it reversed its advance. On Thursday we wrote that there were some negative technical divergences and they may lead to a downward correction. The stock sold-off sharply and closed at $175 that day. On Friday it continued lower but then it bounced off support of $172.50 level again. We may see more uncertainty in the near future:

Amazon.com, Inc. stock (AMZN) reached new record high on Wednesday. The stock continues to trade well above its end of year closing price of $1,167.5, as it remains close to $1,500 mark. AMZN bounced off its upward trend line three weeks ago following downward correction below the price of $1,300. We can see some negative technical divergences along with overbought conditions, but the stock is still remarkably stronger than the broad stock market:

Dow Jones Remains Relatively Weaker

The Dow Jones Industrial Average daily chart shows that blue-chip index reversed its three-week-long rally from February 9 low. The market broke above the resistance level of around 25,500 on Monday a week ago, but it failed to continue higher. It closed much lower on Tuesday following higher open. We saw potential negative candlestick pattern called Dark Cloud Cover. It is 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. This negative downward reversal pattern has been confirmed by Wednesday's move down. Consequently, the index broke below 25,000 mark on Thursday. Is this still just a downward correction after rallying off February panic low? The market continues to trade at a potential support level:

Concluding, the S&P 500 index extended its recent downtrend on Friday before bouncing off support level at around 2,650 and closing 0.5% higher. It remained below previously broken support level of 2,700, so it is still just an upward correction. The broad stock market sharply reversed its short-term uptrend on Tuesday and it basically confirmed the downward reversal on Wednesday. Earlier, the market extended its three-week-long rebound and continued well above 61.8% retracement of the sell-off. Then it quickly reversed its upward course. Is this a new downtrend or just correction following rally from February 9 low? It looks like a downward correction, but was Friday's low the end of it? Probably not.

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 rather 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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Thank you.

Paul Rejczak
Stock Trading Strategist
Stock Trading Alerts
SunshineProfits.com

Stock market strategist, who has been known for quality of his technical and fundamental analysis since the late nineties. He is interested in forecasting market behavior based on both traditional and innovative methods of technical analysis. Paul has made his name by developing mechanical trading systems. Paul is the author of Sunshine Profits’ premium service for stock traders: Stock Trading Alerts.

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