Stock Market Topping Pattern or Just Consolidation?

By: Paul_Rejczak

Stocks traded within a short-term consolidation on Friday, as investors took some profits off the table following the recent advance. The broad stock market accelerated its uptrend after breaking above three-week-long consolidation a week ago. Will it continue its uptrend or is this some topping pattern ahead of downward reversal? There are still two possible medium-term scenarios.

The U.S. stock market indexes gained 0.1-0.3% on Friday, as they fluctuated following the recent advance. The S&P 500 index remained close to its mid-March local high of around 2,800. It currently trades 3.9% below January's 26th record high of 2,872.87. The Dow Jones Industrial Average gained 0.3%, and the technology Nasdaq Composite gained 0.1%, as it was relatively weaker than the broad stock market on Friday.

The nearest important level of resistance of the S&P 500 index is at around 2,780-2,800, marked by mid-March local high. The next resistance level is at 2,830-2,840, marked by the late January short-term consolidation. On the other hand, support level is at 2,760-2,765, marked by recent local lows. The next level of support is at 2,750, marked by previous level of resistance. The support level is also at 2,735-2,740, marked by last Monday's daily gap-up of 2,736.93-2,740.54.

The broad stock market accelerated its short-term uptrend recently following the S&P 500 index' breakout above the resistance level of 2,750. Will it continue higher despite short-term overbought conditions? We may see some more uncertainty and profit taking action. There are still two possible medium-term scenarios - bearish that will lead us below February low following trend line breakdown, and the bullish one in a form of medium-term double top pattern or breakout towards 3,000 mark. There is also a chance that the market will just go sideways for some time, and that would be positive for bulls in the long run (some kind of an extended flat correction):

Virtually Flat Expectations, S&P 500 at Resistance Level

The index futures contracts trade between -0.05% and +0.05% vs. their Friday's closing prices this morning. So, expectations before the opening of today's trading session are virtually flat. The main European stock market indexes have gained 0.2-0.8% so far. There will be no new important economic data announcements today. The broad stock market will likely continue to fluctuate within a short-term consolidation. The S&P 500 index remains below the resistance level of 2,800, but we may see an attempt at breaking higher. There have been no confirmed negative signals so far.

The S&P 500 futures contract trades within an intraday uptrend, as it slightly extends its last week's move up. The nearest important level of support is at around 2,770, marked by some recent fluctuations. The next support level remains at 2,750-2,760. On the other hand, level of resistance is at 2,780, and the next resistance level is at 2,800. The futures contract trades along its resistance level, as we can see on the 15-minute chart:

Nasdaq Relatively Weaker

The technology Nasdaq 100 futures contract extends its short-term consolidation following Thursday's-Friday's downward correction of its recent rally. The market reached new all-time high on Thursday, slightly above its mid-March top. Then it quickly reversed lower. The Nasdaq 100 fell more than 150 points off Thursday's daily high. So, volatility is back. The nearest important level of resistance is now at around 7160, marked by the local highs. The resistance level is also at 7,200-7,230. On the other hand support level is at 7,100-7,120, and the next level of support is at 7,050-7,080. The Nasdaq futures contract extends its short-term consolidation, as the 15-minute chart shows:

Apple, Amazon - Downward Correction

Let's take a look at Apple, Inc. stock (AAPL) daily chart (chart courtesy of http://stockcharts.com). It reached new record high on Thursday, as it slightly extended its short-term uptrend following last Monday's breakout above $190. Then the stock retraced some of its advance on Friday, as it fell closer to $190 again. Investors' sentiment remains bullish, but will the uptrend continue? There have been no confirmed negative signals so far. For now, it looks like a short-term consolidation:

Now let's take a look at Amazon.com, Inc. stock (AMZN) daily chart. It accelerated its uptrend last week, as it reached new record high above $1,700. The stock retraced some of this rally recently. Is this a downward reversal or just a quick downward correction? For now, it looks like a downward correction. The resistance level remains at around $1,700:

Dow Jones Still Relatively Strong

The Dow Jones Industrial Average broke above its medium-term downward trend line in the first half of May. Then it continued higher above a few-week-long downward trend line. However, it kept bouncing off resistance level of 25,000. In the second half of May blue-chip stocks were relatively weaker than the broad stock market, as Dow Jones fell below 24,500 again. On Wednesday, we wrote that "the market is taking an attempt at breaking higher". And it did break up above 25,000 mark. It remains relatively stronger than the broad stock market:

The S&P 500 index fluctuated on Friday, as investors were taking short-term profits off the table following tech stocks' downward correction. Was this a topping pattern or just consolidation before another leg higher? For now, it looks like some relatively flat correction within an uptrend. There have been no confirmed negative signals so far.

Concluding, the S&P 500 index will likely open flat today, and it may extend its Friday's fluctuations. If the index breaks above the resistance level of around 2,780, we could see more buying pressure. But there is also a close resistance level of 2,800. Tech stocks will probably remain weaker than the broad stock market. For now, it looks like a correction, and not a new downtrend.

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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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Disclaimer

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