Stocks extend rally off Friday's low, but short-term exhaustion near

S&P 500 index gained 1.3% on Wednesday, following lower opening of the trading session. The market has extended its rally from Friday’s low. But will it continue higher today? We can see some short-term overbought conditions. Was this two-week-long sell-off the beginning of a new medium-term downtrend or just downward correction before another leg up? It’s hard to say, but this move down set the negative tone for weeks or months to come.

The U.S. stock market extended its short-term uptrend on Wednesday. The main indexes gained 1.0-1.9% following lower opening of the trading session. The S&P 500 index broke above its Monday-Tuesday trading range. The broad stock market gauge retraced most of its last week’s Wednesday-Friday’s sell-off, as it got close to 2,700 mark again. The Dow Jones Industrial Average gained 1.0%, and the technology Nasdaq Composite gained 1.9% yesterday.

The nearest important level of resistance of the S&P 500 index is now at 2,720-2,730, marked by last week’s Wednesday’s local high of 2,727.67. The next resistance level is at 2,740-2,760, among others. On the other hand, support level is at 2,640-2,650, marked by some recent local lows. The next level of support remains at 2,580-2,600, among others. The S&P 500 index is very close to the 50% retracement of the sell-off from record high of 2,872.87 (2702.78). The next important retracement of 61.8% is at 2,742.92.

The index reached its record high more than two weeks ago on Friday, January 26. It broke below month-long upward trend line on Tuesday, January 30 following gap-down opening of the trading session, confirming uptrend’s reversal. Then the market retraced all of its January rally and continued lower. The index extended its downtrend on Friday, as it fell almost 12% below its late January record high. We can see that stocks are sharply reversing their medium-term upward course following the whole retracement of last month’s euphoria rally. The market bounced off its almost year-long medium-term upward trend line on Friday, and it currently trades at its steeper, August-February upward trend line:

Positive Expectations

The index futures contracts trade 0.5-0.9% higher vs. their Wednesday’s closing prices right now. It means that investors’ expectations ahead of the opening of today’s trading session are positive. The European stock market indexes have gained 0.5-1.4% so far. But will the sentiment remained that bullish after cash market opening at 9:30 a.m.? For now, it looks like the market may extend its short-term uptrend and continue its run above 2,700 mark. It may retrace the whole Wednesday-Friday’s sell-off.

Investors will wait for series of economic data announcements today: Producer Price Index, Empire State Manufacturing Index, Philadelphia Fed Manufacturing Index, Initial Claims at 8:30 a.m., Industrial Production, Capacity Utilization at 9:15 a.m., NAHB Housing Market Index at 10:00 a.m. Investors will also wait for more quarterly corporate earnings releases.

The S&P 500 futures contract trades within an intraday consolidation, as it fluctuates following breakout above the level of 2,700. The market sharply reversed its downward course yesterday after selling off before cash market opening. Investors reacted negatively to economic data release, but the futures contract came back and continued much higher.

The nearest important level of support is now at 2,690-2,700, marked by some recent fluctuations. The next support level is at 2,670-2,680, marked by short-term local highs. On the other hand, level of resistance is at 2,725-2,730, marked by previous local high. The next resistance level is at 2,750-2,760, among others. The futures contract trades above 2,700 mark, as we can see on the 15-minute chart:

About the Author