Indices are likely to retreat at the open, but will they continue to fall?
Stocks slightly extended their uptrend on Tuesday, but today, the sentiment is turning bearish and the S&P 500 index will pull back from yesterday’s high of 5,669.67. It is likely to open 1.1% lower, as indicated by futures contracts.
Last Tuesday I decided to open a speculative short position. The market has been fluctuating around that level before rebounding on Friday. In my opinion, the position is still justified.
Investor sentiment has increased significantly last week, as indicated by the AAII Investor Sentiment Survey on Wednesday, which showed that 49.2% of individual investors are bullish, while only 21.7% of them are bearish.
As I mentioned in my stock price forecast for July, “While more advances remain likely, the likelihood of a deeper downward correction also rises. Overall, there have been no confirmed negative signals so far, but the May gain of 4.8% and June gain of 3.5% suggest a more cautionary approach for July (…) The market will be waiting for the quarterly earnings season in the second half of the month. Plus, there will be a series of economic data, including the CPI release on July 11, the Advance GDP number on July 25, and the FOMC Rate Decision on July 31.”
The S&P 500 index continued trading along its record high, as we can see on the daily chart.
Nasdaq 100 Remained Below Last Week’s ATH
The technology-focused Nasdaq 100 index closed just 0.06% higher yesterday, remaining well below its record high of 20,690.97 that was reached last Wednesday.
Last Thursday, I concluded that “There are short-term overbought conditions, and the market is likely to top at some point.” This proved accurate with the Nasdaq 100 reversing sharply from its new record high. This morning, the Nasdaq 100 is likely to open 1.5% lower, extending its short-term downtrend ahead of the important big tech earnings releases next week.
VIX: Creeping Higher
The VIX index, also known as the fear gauge, is derived from option prices. Recently, it has been hovering around the 12 level, which historically is relatively low, indicating low fear in the market. Yesterday, it closed slightly above the 13 level again, indicating more fear in the market.
Historically, a dropping VIX indicates less fear in the market, and rising VIX accompanies stock market downturns. However, the lower the VIX, the higher the probability of the market’s downward reversal.
Futures Contract Pulls Back Below 5,700
Let’s take a look at the hourly chart of the S&P 500 futures contract. Recently, it was fluctuating following a rebound from Friday’s local low of around 5,621, and this morning, it is retracing some of that advance, getting back below the 5,700 level. The resistance level remains at 5,700-5,720, and the support level is at 5,600-5,620. It still looks like a short-term consolidation, and possibly, a topping pattern.
Conclusion
Stocks are poised to open 1.0% lower today, and the S&P 500 index will get closer to the 5,600 level again. Is this a topping pattern ahead of a more pronounced downward correction? It may be so, but the market is awaiting quarterly earnings releases; hence, more volatility seems likely in the near future. Earnings releases are generally better than expected; however, they are also met with ‘sell-the-news’ price action.
I opened a speculative short position in the S&P 500 futures contract last Tuesday.
Quoting my stock price forecast for July, “Investors continue pricing in the Fed’s monetary policy easing that is supposed to happen this year. Hence, a medium-term downward reversal still seems a less likely scenario. However, the recent record-breaking rally may be a cause for some short-term concern as a downward correction may be coming.”
For now, my short-term outlook remains bearish.
Here’s the breakdown:
- The S&P 500 index may be marking a topping pattern before some downward correction.
- Investors are waiting for the coming quarterly earnings season.
- In my opinion, the short-term outlook is bearish.
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Thank you.
Paul Rejczak,
Stock Trading Strategist