Stock prices continue to move sideways. Which direction will be next?
Stocks remained within a short-term consolidation on Thursday, with the S&P 500 index closing virtually flat after briefly nearing Monday's local high. This morning, the S&P 500 is likely to open 0.5% higher following the Core PCE Price Index release, which was as expected at +0.2% month over month. Therefore, stocks may further extend their consolidation ahead of the long holiday weekend.
Last Wednesday, I wrote “Recently, the market has continued to climb following the brief Yen crisis at the start of August, surprising many traders. The question is whether the market will continue to new highs or reverse course and retrace the recent rally. I think there is a chance the market will reverse its course and correct some of the advances, retracing a large part of the rally.”
Investor sentiment remains elevated, as shown by the Wednesday’s AAII Investor Sentiment Survey, which showed that 51.2% of individual investors are bullish, while 27.0% of them are bearish – up from 23.7% last week.
The S&P 500 index continues to trade sideways but remains near its July 16 record high of 5,669.67, as we can see on the daily chart.
Nasdaq 100 Remains Relatively Weaker
The technology-focused Nasdaq 100 remains relatively weaker than the broader stock market; it has been declining since August 22, after rebounding from the 20,000 level. On Wednesday, it was as low as 19,221.48, and yesterday, it closed 0.13% lower.
The resistance level remains around 20,000, marked by the July 17 daily gap down from 20,080.27 to 20,266.51, among others. Today, the Nasdaq 100 is likely to open 0.8% higher, retracing the recent declines once again.
VIX: Going Sideways
On the previous Monday, the VIX index, a measure of market fear, reached a new long-term high of 65.73 - the highest level since the 2008 financial crisis and the COVID sell-off in 2020. Last Monday, it traded as low as 14.46 following a rebound in stock prices. Since then, the VIX has been rising again, reaching a high of 18.06 on Thursday. Yesterday, it came back below 16, indicating 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.
Futures Contract Keeps Going Sideways
Let’s take a look at the hourly chart of the S&P 500 futures contract. This morning, it is retracing some of the intraday decline from yesterday. The resistance remains at 5,660-5,670, marked by local highs. It still appears to be in a short-term consolidation, likely forming a topping pattern.
As I wrote last Wednesday, “The market seems to be heading toward new record highs but is becoming increasingly overbought and susceptible to a short-term correction. The recent volatility suggests a potential shift in the long-term outlook, and the market may be entering a medium-term consolidation.”
Conclusion
The S&P 500 index is expected to open higher this morning, driven by economic data releases, including the Core PCE Price Index. It is still likely to extend its short-term consolidation, especially with the long holiday weekend ahead.
I opened a speculative short position in the S&P 500 futures contract last Tuesday, August 20.
For now, my short-term outlook remains bearish.
Here’s the breakdown:
- The S&P 500 index remains within a short-term consolidation.
- The market may still be forming a topping pattern.
- In my opinion, the short-term outlook is bearish.
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Thank you.
Paul Rejczak,
Stock Trading Strategist