Stocks bounced from the new local low on Friday. Is this the end of a downward correction or just some consolidation before another leg down?

The S&P 500 index slightly extended its short-term downtrend on Friday, as it reached the local low of 4,288.52 right after the opening. But bulls took over and the market gained 1.15% on a daily basis. It came back above 4,350. This morning the market is expected to open slightly lower and we may see more short-term consolidation.

The nearest important support level of the broad stock market index is now at 4,300-4,320, marked by the recent local lows. The next support level is at around 4,250. On the other hand, the resistance level is at 4,380-4,400. The S&P 500 continues to trade below its month-long downward trend line, as we can see on the daily chart.

SPX

Dow Jones didn’t reach a new low

Let’s take a look at the Dow Jones Industrial Average chart. In early September the blue-chip index broke below a two- month-long rising wedge downward reversal pattern. Last week it got back closer to its mid-September local low. However, unlike the broad stock market’s gauge, it managed to stay above that support level. The nearest important resistance level is at around 34,500, as we can see on the daily chart:

INDU

Apple is still at support level

Apple stock weighs around 6.1% in the S&P 500 index, so it is important for the whole broad stock market picture. Since early September it has been declining from the record high. Recently the stock sold off to the previous local lows and on Friday it sold off to around $139 before going back up. The $142 price level is acting as a support level, so it is still a “make or break” situation.

AAPL

We closed our profitable short position on Friday

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 and closed it on Friday at the level of 4,315 with a gain of 120 points because the risk/reward perspective seemed less favorable.

SP500

Conclusion

Last week the broad stock market got back to its mid-September local low and the S&P 500 index fell briefly below 4,300 level. Then we’ve witnessed a short-covering rally. Most likely it was just an upward correction within a downtrend. There have been no confirmed positive signals so far. However, the risk/reward perspective seems less favorable right now and no positions are currently justified.

Here’s the breakdown:

  • The S&P 500 bounced from 4,300 support level on Friday, but for now it looks like a short-term upward correction.

  • Our speculative short position has been closed right before the opening of Friday’s cash market’s trading session.

  • However, we are still expecting more downward pressure and a correction to 4,200-4,250 level.


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All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits' employees and associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski's, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits' employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

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