Are stocks in a new downtrend, or is this still just a correction?
Stock prices fell on Friday, with the S&P 500 index closing 1.32% lower after dipping below the 5,900 level. This marked a deeper retracement of the recent record-breaking rally as market uncertainty returned following economic data releases and the revelation of Donald Trump's cabinet. It still appears to be a correction of the post election advance, and sideways trading is possible. This morning, the S&P 500 is expected to open nearly flat, as futures contracts trade sideways after Friday’s downturn.
Investor sentiment improved last week, as indicated by Wednesday’s AAII Investor Sentiment Survey, which reported that 49.8% of individual investors are bullish, while 28.3% of them are bearish.
The S&P 500 has returned to its October consolidation, as we can see on the daily chart.
S&P 500 Retracing Election Week’s Rally
The S&P 500 fell 2.08% last week after gaining 4.66% the previous week. Currently, it looks like a correction of the recent advance. However, if the market continues to retrace the rally, a medium-term sell signal could emerge.
The key medium-term support level is around 5,700, marked by previous lows.
Nasdaq 100 Also Lower
The Nasdaq 100 index dropped 2.40% on Friday after breaking its 20,600 support level, retreating to its October trading range. This morning, it is expected to open virtually flat, with potential short-term consolidation ahead of NVDA's important earnings release on Wednesday.
VIX Rebounded Sharply
The VIX index, a measure of market volatility, was up nearly 13% on Friday, signaling increased fear in the market and confirming a short-term downturn in stock prices.
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 Contracts Hover at 5,900
On Friday, the S&P 500 futures contract extended its short-term downtrend, dipping below the 5,900 level. This morning, it is trading sideways in a relatively flat correction. Support is at 5,880, marked by the previous highs, and the resistance is at 5,930-5,950.
Conclusion
Stocks are expected to open flat today, with sentiment remaining weak after the retreat last Thursday and Friday. Is this a new downtrend or just a correction? Currently, it seems to be a downward correction following the recent rally. The market will be watching for NVDA's quarterly earnings release on Wednesday after the close of the session.
In my Stock Price Forecast for November 2024, I wrote “The key question is: Will this sell-off mark the start of a medium-term downtrend, or is it merely a downward correction within an uptrend? For now, it appears to be a correction, but next week’s presidential elections could add to volatility.”
For now, my short-term outlook is neutral.
Here’s the breakdown:
- The S&P 500 has retraced more of its post-election rally and still appears to be in a downward correction.
- The market has entered a period of increased volatility.
- In my opinion, the short-term outlook is neutral.
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Thank you.
Paul Rejczak,
Stock Trading Strategist