S&P 500: More short-term weakness despite tech rally?

Stocks backed off from last week’s high yesterday, as investor sentiment worsened following Friday’s jobs data. But more downside may be coming.

The broad stock market index lost 0.34% on Tuesday (Sep. 7), as it bounced from the resistance level of around 4,550. Last Thursday (Sept. 2) saw the index reach a new record high of 4,545.85. This morning the market is expected to open virtually flat. However, it retraced the overnight decline.

The index remains elevated after the recent run-up, so we may see some more profound profit-taking action at some point.

The nearest important support level of the broad stock market index remains at 4,500, and the next support level is at 4,465-4,470, marked by the previous Thursday’s low. On the other hand, the nearest important resistance level is at 4,550. The S&P 500 bounced from its four-month-long upward trend line recently, as we can see on the daily chart.

S&P 500 continues to climb along the trend line

The S&P 500 index remains close to its almost year-long upward trend line. The nearest important medium-term support level remains at 4,300, as we can see on the weekly chart:

Dow jones broke down

Let’s take a look at the Dow Jones Industrial Average chart. The blue-chip index broke below a potential two-month- long rising wedge downward reversal pattern yesterday. It remains relatively weaker, as it didn’t reach a new record high like the S&P 500 and the Nasdaq. The support level remains at around 35,000, as we can see on the daily chart:

Apple reached yet another record high

Apple stock weighs around 6.3% in the S&P 500 index, so it is important for the whole broad stock market picture. Yesterday it reached a new record high of $157.26. We can still see negative technical divergences between the price and indicators and a potential topping pattern. The two-month-long upward trend line remains at around $145, and the nearest important support level is now at $150-152.

Is short position still justified?

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. The position was profitable before the recent run-up. We still think that a speculative short position is justified from the risk/reward perspective.

Conclusion

The S&P 500 index remains relatively close to its last week’s record high of 4,545.85. However, we can see some short- term profit-taking action, although yesterday’s decline has been stopped by the relatively strong tech sector. Today we will most likely see a neutral opening of the trading session followed by another profit-taking action.

The market seems short-term overbought, and we may see some profit-taking action soon. Therefore, we think that the short position is justified from the risk/reward perspective.

Here’s the breakdown:

• The market extended its advance last week, as the S&P 500 index broke above the 4,500 level.

• Our speculative short position is still justified from the risk/reward perspective.

• We are expecting a 5% or bigger correction from the new record high. As always, we’ll keep you, our subscribers, well-informed.

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