Are stock prices poised for further declines following last week’s 2% drop?
Stock prices extended their short-term downtrend on Friday, with the S&P 500 index closing 1.54% lower after reaching a new local low of 5,807.78, the lowest since November 6. This marked a slight break below December’s lows, driven by stronger-than-expected monthly jobs data. Today, the index is expected to open 0.7% lower after an overnight weakness.
On December 9, I noted that “the S&P 500 index reached a new record high of 6,099.97 on Friday. The key question remains whether the uptrend will continue, despite signs of short-term overbought conditions.” The sharp decline following the Fed’s release confirmed that the market was forming a topping pattern, as fluctuations led to a break lower.
Investor sentiment has slightly worsened again, as shown by last Wednesday’s AAII Investor Sentiment Survey, which reported that 34.7% of individual investors are bullish, while 37.4% of them are bearish.
The S&P 500 index is testing its previous local lows, as we can see on the daily chart.
S&P 500: A Downward Week
The S&P 500 lost 1.94% fell 1.94% last week, following a 0.7% gain the prior week. The market is basically extending its consolidation, although, this may also signal the start of a new downtrend.
Key medium-term support level remains around 5,700, marked by previous lows.
Nasdaq 100 Broke the 21,000 Level
The Nasdaq 100 lost 1.57% on Friday, breaking below its previous local lows and the 21,000 level. Key support is around 20,600, marked by July’s high. This morning, the index is set to open 0.9% lower, extending the decline.
VIX: Elevated at 20
On December 18, the VIX index, a measure of market volatility, surged to 28.32, its highest level since early August. After dropping below 15 in late December, the VIX rose again last week, nearing 20 on Friday. This reflects increasing market fear.
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.
S&P 500 Futures Contract: Extending the Decline
This morning, the S&P 500 futures contract extended its downtrend, falling to 5,809. Key support is at 5,800, with resistance at 5,880–5,900, marked by the recent support area.
Conclusion
Stocks sold off sharply on Friday, with major indices reaching new local lows and further retracing their post-election rally. The S&P 500 is expected to open 0.7% lower this morning, extending its decline.
The market faces more uncertainty ahead of the upcoming quarterly earnings season, economic data, and Donald Trump’s inauguration on January 20.
Last Monday, in my Stock Price Forecast for January 2025, I wrote that “the stock market is poised for continued fluctuations following the post-election rally in November. Although the S&P 500 dipped by 2.5% last month, this appears to be just a correction of November’s gains.
Will the market resume its uptrend and reach new record highs? This appears likely at some point, driven by growing optimism ahead of Trump’s upcoming inauguration on January 20. However, rallies may provide selling opportunities, leading to a medium-term consolidation phase.”
For now, my short-term outlook is neutral.
Here’s the breakdown:
- The S&P 500 is likely to extend its downtrend today.
- The stock market is still seeing increased volatility following the post-election rally.
- In my opinion, the short-term outlook is neutral.
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Thank you.
Paul Rejczak,
Stock Trading Strategist