Stocks continue to fluctuate. Is this a topping pattern or just pause within an uptrend?
Tuesday’s trading session didn’t change much as stocks went sideways again, and the S&P 500 index closed 0.39% higher. The market continued to fluctuate following its retreat last Thursday from a new record high of 5,505.53. Today, the index is likely to open virtually flat, as indicated by futures contracts. Thus, it is poised to further extend uncertainty. However, it remains relatively close to record highs, and for now, it only looks like a relatively flat correction of the uptrend.
In my forecast for June, I wrote “For the last three months, the S&P 500 index has been fluctuating along new record highs, above the 5,000 level which was broken in February. It looks like a consolidation within a long-term uptrend, but it may also be a topping pattern before some meaningful medium-term correction. What is it likely to do? As the saying goes, 'the trend is your friend', so the most likely scenario is more advances in the future.
However, a negative signal would be a breakdown below the 5,000 level. That would raise the question of a deeper correction and downward reversal. I think that the likelihood of a bullish scenario is 60/40 - a downward reversal cannot be completely ruled out. The market will be waiting for more signals from the Fed about potential interest rate easing, plus, at the end of the month, the coming earnings season may dictate the market moves.”
Last week, investor sentiment remained unchanged, as indicated by the AAII Investor Sentiment Survey last Wednesday, which showed that 44.4% of individual investors are bullish, while 22.5% of them are bearish (down from last week's reading of 25.7%). The AAII sentiment is a contrary indicator in the sense that highly bullish readings may suggest excessive complacency and a lack of fear in the market. Conversely, bearish readings are favorable for market upturns.
The S&P 500 index is going sideways after breaking its upward trend line, as we can see on the daily chart.
Nasdaq 100 Rebounded Over 1%
Last Thursday, the technology-focused Nasdaq 100 index reached a new record high of 19,979.93, and since then, it has been retracing some of that advance. However, yesterday, it rebounded and closed 1.16% higher. This morning, it is poised to open 0.2% higher, and it’s likely to further extend a consolidation.
VIX Dipped Below 13
The VIX index, also known as the fear gauge, is derived from option prices. In late May, it set a new medium-term low of 11.52 before rebounding up to around 15 on correction worries. Since Thursday, it has been closing above the 13 level, showing increasing fear in the market. Yesterday, the VIX closed below 13 on hopes that a correction in stocks may be ending.
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 Remains Above 5,500
Let’s take a look at the hourly chart of the S&P 500 futures contract. Last Thursday, it reached a new high of around 5,588. Since then, the market has been fluctuating with the support level at around 5,520. On the other hand, the resistance is at 5,550.
Conclusion
Stocks are likely to open virtually flat this morning. The market is trading sideways after Thursday’s intraday retreat, and the question remains: has the uptrend reversed? For now, it’s a consolidation. It seems that the market may go sideways for some time. Investors will be waiting for more economic data this week: the GDP tomorrow, and the important Core PCE Price Index on Friday.
For now, my short-term outlook remains neutral.
Here’s the breakdown:
- The S&P 500 reversed lower from a new record high on Thursday; this week, it is extending a consolidation.
- Recently, stock prices were reaching new record highs despite mixed data and growing uncertainty.
- In my opinion, the short-term outlook is neutral.
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Thank you.
Paul Rejczak,
Stock Trading Strategist