Stocks have retraced Thursday’s decline. Are they forming a topping pattern?
Stock prices retraced their Thursday decline on Friday, with the S&P 500 index gaining 1.15% and closing above the 5,600 level. Investors reacted to Fed Chair Powell’s speech at the Jackson Hole Symposium. As a result, the market is approaching its July 16 record high of 5,669.6 again. This morning, the S&P 500 is likely to open 0.1% higher, as indicated by futures contracts.
Last 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 last Tuesday, August 20.
Investor sentiment improved significantly last 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 extended a short-term consolidation on Friday, as we can see on the daily chart.
S&P 500: Third Week Higher in a Row
Compared to the previous Friday’s closing price, the index gained 1.45%, extending its previous week’s gain of 3.9%.
In the short term, the market may be nearing a downward correction, but overall, the medium-term outlook remains very bullish.
Nasdaq 100: Uncertainty Below 20,000
The technology-focused Nasdaq 100 approached the 20,000 level last week. On Friday, it recovered some of Thursday’s losses, gaining 1.18%. However, it remained relatively weaker than the broader stock market. Recently, it 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 0.1% lower.
VIX: Consolidating Around 16
On the previous 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.
Last 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 on Thursday. On Friday, it pulled back, indicating less 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. Conversely, the higher the VIX, the higher the probability of the market’s upward reversal.
Futures Contract Is at a Local High Again
Let’s take a look at the hourly chart of the S&P 500 futures contract. It retraced all of Thursday’s decline, and this morning, it’s trading around the 5,660 level. It still appears to be in a short-term consolidation, likely forming a topping pattern. The resistance level remains between 5,700-5,720, marked by previous highs.
As I wrote last 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 S&P 500 is likely to open slightly higher this morning. The market may further extend its consolidation following the recent rally. Much will depend on the key earnings release from NVDA, due on Wednesday after the session closes.
I decided to open a speculative short position in the S&P 500 futures contract last Tuesday, August 20.
On August 9, 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 Thursday’s losses on Friday following the Fed Chair Powell’s speech.
- The market may be still forming a topping pattern.
- In my opinion, the short-term outlook is bearish.
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Thank you.
Paul Rejczak,
Stock Trading Strategist