Was yesterday’s pullback the start of a new downtrend, or just a brief downward correction?
Stocks broke below their short-term consolidation range yesterday as sentiment worsened ahead of earnings releases and due to uncertainty surrounding the upcoming presidential elections. The S&P 500 index closed down 0.92%; however, it rebounded from a local low of 5,762.41, having dropped as much as 1.5% at its lowest point. This morning, the index is expected to open 0.5% higher, following Tesla's (TSLA) better-than-expected earnings release after yesterday's session closed.
Investor sentiment worsened considerably, as shown by the yesterday’s AAII Investor Sentiment Survey, which reported that 37.7% of individual investors are bullish, while 29.9% of them are bearish, up from 25.4% last week.
The S&P 500 rebounded from its previous local highs area yesterday, as we can see on the daily chart.
Nasdaq 100: Lower, Yet Still Above 20,000
The Nasdaq 100 has been trading within a tight range, and yesterday it broke down slightly below the key 20,000 level. The tech-heavy index closed 1.55% lower, underperforming the broader market. However, it is poised to open 1.1% higher this morning, driven by the TSLA earnings. Tesla shares are up over 14% in pre-market trading.
VIX: Remaining Near 20
On September 6, the VIX index, a measure of market fear, reached a local high of 23.76. On September 26, it fell to 14.90 as stock prices were advancing toward new record highs. Recently, the VIX has been fluctuating around the 20 level. Yesterday, it hovered near 20 again, signaling increased market anxiety.
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 Rebounded from 5,800
The S&P 500 futures contract sold off to a local low of around 5,801 yesterday, but a rebound in the final hour of trading, intensified by the TSLA earnings release, brought it back toward the resistance marked by recent highs. The market is now hovering around the recent local lows, increasing short-term uncertainty. Resistance is at 5,900-5,925, while support is at 5,800-5,825.
Conclusion
Wednesday’s session saw a breakdown below the recent trading range, but the rebound following TSLA’s earnings suggests more fluctuations and consolidation ahead, rather than the start of a new downtrend. The S&P 500 is expected to open 0.5% higher today, but the key question remains: is this a topping pattern or just a consolidation before another leg up? For now, it still looks like a consolidation and a flat correction of the record-breaking rally.
For now, my short-term outlook is neutral.
Here’s the breakdown:
- The S&P 500 retraced its early October gains yesterday.
- Currently, this looks like an extended consolidation following the rally from September’s low.
- In my opinion, the short-term outlook is neutral.
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Thank you.
Paul Rejczak,
Stock Trading Strategist