S&P 500 Back Below 4,400. Dip to Buy or a New Downtrend?

Stocks sold off yesterday as the fear of Fed tapering grew. Monday’s run-up was definitely a bull trap, and our short position is profitable now.

The S&P 500 index lost 1.1% on Wednesday and the futures contract continued selling off overnight. The index will most likely break below its late July consolidation and the support level of 4,370 this morning. However, it may get near a short-term bottom, as it gets closer to the 4,350 level. It’s the nearest important support level, marked by the three-month-long upward trend line, as we can see on the daily chart (chart by courtesy of http://stockcharts.com):

Profitable short position

Let’s take a look at the hourly chart of the S&P 500 futures contract. We opened our short position on Thursday a week ago at the level of 4,435. The position is profitable, but we will wait for more downside movement, as there have been no confirmed short-term positive signals so far. If the market extends the short-term decline, we will move the stop-loss level lower (chart by courtesy of http://tradingview.com):

Conclusion

The S&P 500 index got back to the 4,400 level yesterday following the Fed minutes release, among others factors. The market is expected to extend the decline this morning but it’s also likely that it will reach a short-term bottom. Thus, we may see an intraday upward correction.