Are stock prices poised for a correction, or is this merely a consolidation before another leg up?
Geopolitical tensions in the Middle East led to a drop in the stock market, with the S&P 500 index closing 0.93% lower yesterday. It pulled back to a local low of 5,681.28 before rebounding above 5,700. Yesterday, I mentioned that the market “may see some more short-term uncertainty and a sideways trading action.”, and it’s proving correct. This morning, the S&P 500 is likely to open 0.2% lower as indicated by futures contract.
Investor sentiment remains elevated, as shown by last Wednesday’s AAII Investor Sentiment Survey, which reported that 49.6% of individual investors are bullish, while only 23.7% of them are bearish, down from 26.4% last week.
The S&P 500 continues to move sideways, as we can see on the daily chart.
Nasdaq 100: Showing Relative Weakness
The Nasdaq 100 lost 1.43% on Tuesday, retracing more of its recent advances and going back below the mid-August local high. Recently, it pulled back from the resistance of 20,250. This morning, tech stocks are expected to open flat.
VIX Bounces Back to 20
On September 6, the VIX index, a measure of market fear, reached a local high of 23.76. It was indicating elevated fear among investors. However, a stock rebound followed by a record-breaking rally pushed the VIX lower. Last Thursday, it fell to 14.90, its lowest level since late August. However, with stock prices pulling back yesterday, the VIX jumped back to 20.73.
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 Lower
Let’s take a look at the hourly chart of the S&P 500 futures contract. It has retraced some recent gains and dipped below local lows. The support level is at around 5,680-5,700, marked by mid-September fluctuations. The market may still be in a topping pattern ahead of a potential correction.
Conclusion
On Monday, the S&P 500 bounced from a local low, providing some optimism for the bulls. However, yesterday's trading session renewed pessimism as markets reacted to news of the Israel-Iran conflict.
Yesterday, I wrote “The key question is whether the uptrend will continue despite overbought conditions. While no clear negative signals have appeared, the rally seems overstretched.” The market is expected to open slightly lower today, continuing its short-term fluctuations.
I opened a speculative short position in the S&P 500 futures contract on September 16.
In my Stock Price Forecast for October 2024, I wrote “the market extended its uptrend in September after rebounding from the early August low. No clear negative signals have surfaced; however, a correction could still occur. Historically, October is a seasonally weak month, especially during its first weeks. Will the stock market sell off soon? Although monetary policy easing supports the bulls, uncertainty surrounding geopolitical risks and the upcoming presidential election may still weaken sentiment.”
For now, my short-term outlook remains bearish.
Here’s the breakdown:
- The S&P 500 is likely to continue short-term consolidation following record-breaking rally.
- The market may still be forming a topping pattern before a downward correction.
- In my opinion, the short-term outlook is bearish.
The full version of today’s analysis - today’s Stock Trading Alert - is bigger than what you read above, and it includes the additional analysis of the Apple (AAPL) stock and the current S&P 500 futures contract position. I encourage you to subscribe and read the details today. Stocks Trading Alerts are also a part of our Diamond Package that includes Gold Trading Alerts and Oil Trading Alerts.
And if you’re not yet on our free mailing list, I strongly encourage you to join it - you’ll stay up-to-date with our free analyses that will still put you ahead of 99% of investors that don’t have access to this information. Join our free stock newsletter today.
Thank you.
Paul Rejczak,
Stock Trading Strategist