Excited About Market Highs? Don't Be – Looks Like A Topping Pattern

Stocks changed little on Tuesday, but the S&P 500 reached a new record high. Is the market able to break above 4,500, or is it running low on fuel?

The S&P 500 index gained 0.15% on Tuesday (Aug. 24) and it reached yet another new record high of 4,492.81. The market is getting closer to the 4,500 price level as investors await the Jackson Hole Symposium that begins tomorrow. And on Friday we will get a speech from Fed Chair Powell.

The nearest important support level of the broad stock market index is now at 4,450. On the other hand, the resistance level is at 4,490-4,500. The S&P 500 bounced from its four-month-long upward trend line last week, as we can see on the daily chart (chart by courtesy of http://stockcharts.com):

Dow Jones in a Topping Pattern?

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

Apple Struggles at $150 Price Level

Apple stock got back to the resistance level of $150-152, marked by an August 17 record high of $151.68. We can still see negative technical divergences between the price and indicators. Overall, it looks like a medium-term topping pattern. The two-month-long upward trend line is now at around $145.

Short Position is Still Justified

Let’s take a look at the hourly chart of the S&P 500 futures contract. We opened a short position on Thursday, 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. (chart by courtesy of http://tradingview.com):

Conclusion

The S&P 500 index reached new record high yesterday, but it gained just 0.15%. The market will most likely turn south again and extend its weeks-long consolidation. Therefore, we think that the short position is justified from the risk/reward perspective.

Here’s the breakdown:

• The market reached a new record high as it got closer to the 4,500 mark.
• 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.

Paul Rejczak,

Stock Trading Strategist

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