Have stock prices reversed their downtrend?
Friday’s trading session saw a rebound in the stock market, with the S&P 500 index closing 1.09% higher and moving back above the 5,900 level. A lower-than-expected Core PCE Price Index release, combined with the quadruple witching day, brought some optimism, helping the market retrace some of Wednesday’s losses. This morning, the S&P 500 is expected to open 0.1% higher, likely entering a consolidation ahead of the holiday pause.
On Monday, 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.” Wednesday’s sharp decline confirmed the market was forming a topping pattern, as fluctuations led to a break lower.
Investor sentiment slightly worsened before the sell-off. as shown by last Wednesday’s AAII Investor Sentiment Survey, which reported that 40.7% of individual investors are bullish, while 31.4% of them are bearish - a slight decrease from 31.7% last week.
The S&P 500 index rebounded from around 5,850 on Friday, as we can see on the daily chart.
S&P 500: -2% In a Week
The S&P 500 lost 1.99% last week, extending the prior week’s 0.6% decline. Last week, I wrote that “while no negative signals are evident, the market may face a correction at some point.” This proved accurate, as the S&P 500 corrected more of its post-election rally.
The key medium-term support level remains around 5,700, marked by previous lows.
Nasdaq 100 Rebounded from 21,000
The Nasdaq 100 index closed 0.85% higher on Friday after rebounding from a new local low of 20,913.72. It retraced a large part of its recent declines, reaching as high as 21,540. Today, the technology index is expected to open 0.2% higher, and it may see a consolidation.
VIX Declined
Last Wednesday, the VIX index, a measure of market volatility, surged to 28.32, its highest level since early August. It confirmed heightened fear in the market as stocks sold off. On Friday, the VIX fell below the important 20 level, reflecting the market rebound.
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: Consolidating Around 6,000
This morning, the S&P 500 futures contract is trading near the 6,000 level, fluctuating following Friday’s rebound. Resistance is around 6,050, while support is at 5,980, among others.
Conclusion
Monday’s trading session is set to open slightly higher. However, pre-market volatility suggests that the S&P 500 may continue to move sideways. Friday’s rebound appears to be an upward correction following recent declines.
Last Wednesday, I noted “A rotation within stocks continues, with some reaching record highs while recent leaders are lagging. Whether the market breaks higher after the Fed decision remains to be seen. Any breakout could lead to profit-taking, potentially extending a consolidation.” This has proven accurate, with the market forming a topping pattern that broke lower.
Last Monday, in my Stock Price Forecast for December 2024, I wrote “the stock market experienced a strong rally in November, driven by the presidential election outcome. While December is historically a bullish month, increased volatility and a short-term correction remain likely.”
For now, my short-term outlook is neutral.
Here’s the breakdown:
- The S&P 500 rebounded from a new local low on Friday.
- The market is seeing increased volatility following the post-election rally.
- In my opinion, the short-term outlook is neutral.
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Paul Rejczak,
Stock Trading Strategist