Stock prices accelerated their downtrend. Are they nearing local lows?
Wednesday’s trading session brought further declines for the stock market, with the S&P 500 index breaking below its Friday low and closing 2.31% lower. This marked its lowest level since June 17. Are we nearing a local low, or will the sell-off continue? This morning, the index is likely to open 0.1% higher following the release of the Advance GDP report, which came in much higher than expected at +2.8% q/q.
My speculative short position in S&P 500, opened on July 9 became much more profitable.
Investor sentiment has worsened, as indicated by yesterday’s AAII Investor Sentiment Survey, which showed that 43.2% of individual investors are bullish, while 31.7% of them are bearish – up from 23.4% last week.
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 broke the 5,500 level and the upward trend line yesterday, as we can see on the daily chart.
Nasdaq 100 Selling Off
The technology-focused Nasdaq 100 index sold off by 3.65% yesterday, remaining relatively weaker than the broader stock market. This morning, it is expected to open 0.1% higher. However, the market may see a rebound at some point, as it is becoming oversold in the short-term.
On the previous 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 recent sharp downward reversal and a sell-off that continued yesterday.
VIX Advances Showing Fear
The VIX index, a measure of market fear, has been hovering around the 12-13 level since May. Last week, it was reaching 17, and yesterday, it was as high as 18.46, confirming the downtrend. (The chart seems to have a glitch with the lowest reading below 11 on Friday).
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 Following Yesterday’s Sell-Off
Let’s take a look at the hourly chart of the S&P 500 futures contract. Overnight, it reached new lows of around 5,450. So, there is no rebound following yesterday’s sell-off, and the market is likely to fluctuate or extend the downtrend at the beginning of the session. However, it may see an intraday rebound at some point. The resistance level is now at 5,500, among others.
Conclusion
The stock market is likely to open slightly higher this morning, but there is still much fear that could lead to further declines. However, we seem to be getting closer to a short-term local low and a potential upward correction, possibly another “dead cat bounce.”
On Tuesday, I wrote “The S&P 500 index rebounded yesterday, but was it an upward reversal or just a correction following recent declines? For now, it looks like a correction. The next market direction will likely be determined by the upcoming quarterly earnings releases (…) Overall, yesterday’s rebound wasn’t much of a game-changer, and it seems likely that we will see new lows in the near future.”
This proved accurate as stocks accelerated the downtrend after breaking below local lows. Today, my conviction about more declines in the market is weaker as we could see a rebound or consolidation following that sell-off. Investors will be waiting for the Core PCE Price Index release tomorrow and the important earnings releases next week.
My speculative short position in the S&P 500 futures contract, opened on July 9, has become more profitable.
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 resumed its downtrend, and the Nasdaq 100 sold off by almost 4%, but a short-term local low may be in sight.
- Investors are waiting for more quarterly earnings releases from big-techs next week.
- In my opinion, the short-term outlook is bearish.
The full version of today’s analysis - today’s Stock Trading Alert - is bigger than what you read above, and it includes the additional analysis of the Apple (AAPL) stock and the current S&P 500 futures contract position. I encourage you to subscribe and read the details today. Stocks Trading Alerts are also a part of our Diamond Package that includes Gold Trading Alerts and Oil Trading Alerts.
And if you’re not yet on our free mailing list, I strongly encourage you to join it - you’ll stay up-to-date with our free analyses that will still put you ahead of 99% of investors that don’t have access to this information. Join our free stock newsletter today.
Thank you.
Paul Rejczak,
Stock Trading Strategist