Can the S&P 500 continue higher despite overbought conditions?
Friday’s trading session didn’t change much for the stock market, with the S&P 500 index gaining 0.40% and remaining near its Thursday’s record high of 5,878.46. Investors are anticipating more quarterly earnings reports, with the TSLA release on Wednesday in focus this week. Today, the S&P 500 is likely to open 0.3% lower, retracing some of its Friday’s advance and further extending its short-term consolidation.
Despite more advances of the stock market, investor sentiment slightly worsened, as shown by last Wednesday’s AAII Investor Sentiment Survey, which reported that 45.5% of individual investors are bullish, while 25.4% of them are bearish, up from 20.6% last week.
The S&P 500 continues to trade above its short-term upward trend line, as we can see on the daily chart.
S&P 500: Consistently Higher
Compared to the previous Friday's close, the S&P 500 gained 0.85%, following last week’s advance of 1.1%. The market continued its record-breaking run last week. The key support level is now between 5,600-5,700, while potential resistance is at 6,000.
Nasdaq 100: Moving Sideways
The Nasdaq 100 gained 0.66% on Friday, retracing its Thursday’s intraday decline. It remains above the 20,000 level, however, still well below the record high of 20,690.97 from July 10. Today, the Nasdaq 100 is expected to open 0.4% lower, further extending its short-term consolidation.
Last Tuesday, I wrote that “tech stocks may experience a period of uncertainty as investors await quarterly earnings and future outlooks.” That still holds true.
VIX Extended Declines
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, and on Friday, it moved towards 18, signalling less fear in the market.
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: Fluctuations Along 5,900
Let’s take a look at the hourly chart of the S&P 500 futures contract. It continues to fluctuate along the 5,900 level. The support level remains at 5,850, marked by short-term lows. On the other hand, the resistance level is now at 5,925, marked by record highs.
Conclusion
This morning, the S&P 500 is likely to open slightly lower, extending last week’s consolidation. The market remains near the record high, and investor sentiment is elevated ahead of big tech earnings releases. The question is: is this a topping pattern or just a consolidation before another leg up? For now, it 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 is likely to fluctuate within a consolidation ahead of key earnings releases.
- Stock prices may be forming a local high, however, no negative signals are evident.
- In my opinion, the short-term outlook is neutral.
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Thank you.
Paul Rejczak,
Stock Trading Strategist