Stocks will rally at the open, but the question is: Is there more upside?
Stocks prices went sideways on Wednesday, despite reaching a new record high for the S&P 500 index at 5,741.03. The market closed 0.19% lower. However, this morning, sentiment has improved, and the S&P 500 is likely to open 0.7% higher, following an overnight rally after Micron (MU) earnings, among other factors.
I still think that the market is forming a high, and the seasonal pattern will play out in such a way that indexes will set their highs in September, with the low of the correction occurring in October.
I am still maintaining a speculative short position, opened last Monday (September 16).
Investor sentiment remains elevated, as shown by yesterday’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 its record-breaking advance, as we can see on the daily chart.
Nasdaq 100 Approaches 20,000 Again
The Nasdaq 100 gained 0.14% yesterday, extending Tuesday’s 0.5% advance. It continued to crawl higher, though it remained below 20,000. This morning, it is likely to break higher and approach its early July local lows. Futures contracts point to a 1.4% higher opening for the Nasdaq 100. A possible resistance level is around 20,250.
VIX Gradually Declining
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 last week pushed the VIX lower. Yesterday, it fell to 15.17, its lowest level since late August.
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 Hits a New Record
Let’s take a look at the hourly chart of the S&P 500 futures contract. It broke the 5,800 level today, extending its short-term uptrend. However, the market is becoming overbought, with support now at 5,780–5,800.
Conclusion
Today’s trading session is set to open much higher following an overnight rally, with the S&P 500 likely to reach new record highs, approaching the 5,800 level. Will the uptrend continue despite overbought conditions? There have been no confirmed negative signals, but it seems the advance may be overstretched.
Last Wednesday, I noted “A "buy the rumor, sell the news" scenario seems likely, but a bullish breakout to new highs can't be ruled out either.” Thursday’s rally invalidated a quick reversal scenario. While the overall market outlook remains bullish, this could also be the formation of a topping pattern before a more significant downward correction.
I opened a speculative short position in the S&P 500 futures contract last Monday (September 16).
In my Stock Price Forecast for September 2024, I noted that, “the market experienced significant volatility in August, with a roller-coaster ride that included a sell-off to the August 5 local low and a subsequent advance, leading to a consolidation near the record high. (…) sharp reversal suggests more volatility in September. Last month, I wrote that ‘August is beginning on a very bearish note, but the market may find a local bottom at some point.’ The same could be said today, and September will likely not be entirely bearish for stocks.”
For now, my short-term outlook remains bearish.
Here’s the breakdown:
- The S&P 500 is set to reach new record highs this morning.
- The market may still be forming a topping pattern before a downward correction.
- In my opinion, the short-term outlook is bearish.
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Thank you.
Paul Rejczak,
Stock Trading Strategist