Stocks are about to extend their short-term consolidation. Which direction is next?
The stock market reacted positively to monthly jobs data on Friday, with the S&P 500 index closing 0.90% higher and moving closer to the September 26 record high of 5,767.37. However, this morning, the index is expected to open 0.3% lower, continuing a short-term consolidation.
Investor sentiment slightly worsened, as shown by last Wednesday’s AAII Investor Sentiment Survey, which reported that 45.5% of individual investors are bullish, while 27.3% of them are bearish, up from 23.7% last week.
The S&P 500 remains within a consolidation, as we can see on the daily chart.
S&P 500: Sideways Week
Compared to the previous Friday's close, the S&P 500 gained 0.22%, following a 0.6% increase the week before. Key support holds around the previous highs at the 5,650 level, with resistance at 5,750–5,800.
Nasdaq 100: Above 20,000 Again
The Nasdaq 100 rebounded on Friday, gaining 1.22% to close just above the 20,000 level. Resistance remains around 20,250, marked by recent highs. This morning, the Nasdaq 100 is expected to open 0.5% lower, extending its short-term consolidation.
VIX: Still Around 20
On September 6, the VIX index, a measure of market fear, reached a local high of 23.76. It was indicating elevated fear among investors. However, a stock rebound followed by a record-breaking rally pushed the VIX lower. On the previous Thursday, it fell to 14.90, its lowest level since late August. However, with stock prices pulling back last week, the VIX jumped back to around 20.
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: Below 5,800
Let’s take a look at the hourly chart of the S&P 500 futures contract. This morning, the market is pulling back following Friday’s advance. It remains in consolidation around the 5,800 level. The support level remains around 5,725, with the next support at 5,680–5,700, marked by mid-September fluctuations. Resistance is still at 5,800.
Conclusion
The week is set to open slightly lower for the S&P 500. On Friday, the index retraced some recent declines, extending its consolidation. Investors are awaiting Thursday’s Consumer Price Index release and the upcoming quarterly earnings season.
Last Tuesday, I wrote “The key question is whether the uptrend will continue despite overbought conditions. While no clear negative signals have appeared, the rally seems overstretched.” The question remains: is this a topping pattern before some more meaningful downward correction or just a consolidation before another leg up?
I opened a speculative short position in the S&P 500 futures contract on September 16.
In my Stock Price Forecast for October 2024, I wrote “the market extended its uptrend in September after rebounding from the early August low. No clear negative signals have surfaced; however, a correction could still occur. Historically, October is a seasonally weak month, especially during its first weeks. Will the stock market sell off soon? Although monetary policy easing supports the bulls, uncertainty surrounding geopolitical risks and the upcoming presidential election may still weaken sentiment.”
For now, my short-term outlook remains bearish.
Here’s the breakdown:
- The S&P 500 is likely to extend its short-term consolidation this morning.
- The market may still be forming a topping pattern before a downward correction.
- In my opinion, the short-term outlook is bearish.
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Thank you.
Paul Rejczak,
Stock Trading Strategist