The S&P 500 pulled back from a new local high. Is this a mere downward correction?
Thursday’s trading session saw a pullback in the stock market, with the S&P 500 index closing 0.89% lower. This decline followed an advance to new local high of 5,643.22, close to the July 16 record high of 5,669.6. This morning, the S&P 500 is expected to open 0.5% higher, recovering some of yesterday's losses ahead of Fed Chair Powell’s speech at the Jackson Hole Symposium at 10:00 a.m.
On Wednesday, I wrote “Recently, the market has continued to climb following the brief Yen crisis at the start of August, surprising many traders. The question is whether the market will continue to new highs or reverse course and retrace the recent rally. I think there is a chance the market will reverse its course and correct some of the advances, retracing a large part of the rally.”
I decided to open a speculative short position on Tuesday, August 20.
Investor sentiment has improved significantly this week, as shown by Wednesday’s AAII Investor Sentiment Survey, which showed that 51.6% of individual investors are bullish, while only 23.7% of them are bearish – down from 28.9% last week.
The S&P 500 index retraced some of its recent advances yesterday, as we can see on the daily chart.
Nasdaq 100 Reversing from 20,000
The technology-focused Nasdaq 100 approached the 20,000 level yesterday, before rebounding and closing 1.68% lower. Recently, the index was driven higher by a few key stocks, including NVDA, which rallied by over 40% from its low point.
The resistance level remains around 20,000, marked by the July 17 daily gap down of 20,080.27 to 20,266.51, among others. Today, the Nasdaq 100 is likely to open 0.8% higher, retracing some of its yesterday’s decline.
VIX: Rebounding from 15
Last Monday, the VIX index, a measure of market fear, reached a new long-term high of 65.73 - the highest level since the 2008 financial crisis and the COVID sell-off in 2020. This reflected significant fear in the market. On Monday, it traded as low as 14.46, following a rebound in stock prices. Since then, the VIX has been rising again, reaching a high of 18.06 yesterday.
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. Conversely, the higher the VIX, the higher the probability of the market’s upward reversal.
Futures Contract: Consolidation Around 5,600
Let’s take a look at the hourly chart of the S&P 500 futures contract. This morning, it’s retracing some of yesterday’s decline, reaching as high as 5,628. For now, this appears to be an upward correction. Much will depend on Fed Chair Powell’s speech at 10:00 a.m. The resistance level remains between 5,700-5,720, marked by previous highs.
As I wrote on Wednesday, “The market seems to be heading toward new record highs but is becoming increasingly overbought and susceptible to a short-term correction. The recent volatility suggests a potential shift in the long-term outlook, and the market may be entering a medium-term consolidation.”
Conclusion
The rebound from the previous Monday’s low has been significant, and bulls have regained control of the market. However, the market retraced some of its gains yesterday, and it may be starting a downward correction or a broader downtrend.
The stock market is expected to rebound this morning, as indicated by futures contracts. All eyes are on Fed Chair Powell’s speech at the Jackson Hole Symposium at 10:00 a.m.
I decided to open a speculative short position in the S&P 500 futures contract on Tuesday, August 20.
On the previous Friday, I wrote “(…) rebound brought some hope for bulls, but it seems they are not out of the woods yet. The recent sell-off was significant, and it will likely take more time to recover.
There is also a chance that the current advances are merely an upward correction, and the market could revisit its lows at some point.”
For now, my short-term outlook remains bearish.
Here’s the breakdown:
- The S&P 500 index retraced some gains yesterday; Powell’s Jackson Hole speech is in focus.
- The market may be starting a downward correction of recent gains.
- In my opinion, the short-term outlook is bearish.
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Thank you.
Paul Rejczak,
Stock Trading Strategist