Stocks Extended Their Downtrend, But Will They Continue Lower?

Briefly: In our opinion, speculative short positions are favored (with stop-loss at 2,410, and profit target at 2,200, S&P 500 index).

Our intraday outlook is bearish, and our short-term outlook is bearish. Our medium-term outlook remains neutral, following S&P 500 index breakout above last year's all-time high:

Intraday outlook (next 24 hours): bearish
Short-term outlook (next 1-2 weeks): bearish
Medium-term outlook (next 1-3 months): neutral
Long-term outlook (next year): neutral

The main U.S. stock market indexes were mixed between -0.3% and +0.2% on Wednesday, extending their short-term fluctuations following recent move down, as investors reacted to economic data releases, among others. The S&P 500 index remains around 1.5% below its new all-time high of 2,400.98. The Dow Jones Industrial Average closed below 21,000 mark once again, and the technology Nasdaq Composite index remained below the level of 5,900. All three major stock market indexes continue to trade relatively close to their new record highs. The nearest important level of support of the S&P 500 index is at around 2,360, marked by previous short-term consolidation. The next support level is at 2,350-2,355, marked by February 21 daily gap up of 2,351.16-2,354.91. The support level is also at around 2,320. On the other hand, the nearest important level of resistance is at around 2,380, marked by some short-term local highs, and the next resistance level is at 2,390-2,400, marked by all-time high. Will the market extend its year-long medium-term uptrend even further before some more meaningful downward correction? We can see some short-term volatility following four-month-long rally off last year's November low at around 2,100. Is this a topping pattern before downward reversal? The uptrend accelerated last Wednesday, and it looked like a blow-off top pattern accompanied by some buying frenzy. The S&P 500 index continues to trade above its medium-term upward trend line, as we can see on the daily chart:

Expectations before the opening of today's trading session are virtually flat, with index futures currently down 0.1%. The European stock market indexes have lost 0.2-0.6% so far. Investors will now wait for some economic data announcements: Initial Claims, Export Prices, Imports Prices at 8:30 a.m. The market expects that the Initial Claims number was at 240,000 las week. The S&P 500 futures contract trades within an intraday downtrend, as investors react to oil prices sell-off, among others. The market is close to support level of 2,360, marked by local lows. The next support level remains at around 2,340-2,350. On the other hand, resistance level is at 2,370-2,375, marked by short-term consolidation. The next level of resistance is at 2,380-2,385, marked by recent local highs. The market trades within a short-term downtrend, as it retraces its last week's rally. Will it continue lower? Or is this some bottoming pattern before another leg up?

The technology Nasdaq 100 futures contract follows a similar path, as it currently trades within an intraday downtrend. However, it remains above its recent local lows, after yesterday's move up. It has bounced off support level at around 5,330-5,340. The nearest important level of resistance is at 5,365-5,375, marked by short-term consolidation. The next resistance level is at 5,390-5,400, marked by record high. The technology sector futures contract is relatively stronger than the broad stock market recently. It continues to trade within a short-term consolidation, as the 15-minute chart shows:

Concluding, the broad stock market remained within a short-term downtrend on Wednesday, as the S&P 500 index closed below its last week's Wednesday's daily gap up. For now, it looks like a downward correction within an uptrend. But will the uptrend continue despite some clear short-term overbought conditions? Or is this a topping pattern before more meaningful downward correction? There have been no confirmed negative signals so far. However, we still can see medium-term overbought conditions accompanied by negative technical divergences. Therefore, we continue to maintain our speculative short position (opened on Wednesday, February 15 at 2,335.58 - opening price of the S&P 500 index). Stop-loss level is at 2,410 and potential profit target is at 2,200 (S&P 500 index). You can trade S&P 500 index using futures contracts (S&P 500 futures contract - SP, E-mini S&P 500 futures contract - ES) or an ETF like the SPDR S&P 500 ETF - SPY. It is always important to set some exit price level in case some events cause the price to move in the unlikely direction. Having safety measures in place helps limit potential losses while letting the gains grow.

To summarize: short position in S&P 500 index is justified from the risk/reward perspective with the following entry prices, stop-loss orders and profit target price levels:

S&P 500 index - short position: profit target level: 2,200; stop-loss level: 2,410

S&P 500 futures contract (March) - short position: profit target level: 2,197; stop-loss level: 2,407

SPY ETF (SPDR S&P 500, not leveraged) - short position: profit target level: $220; stop-loss level: $241

SDS ETF (ProShares UltraShort S&P500, leveraged: -2x) - long position: profit target level: $15.47; stop-loss level: $12.98