Are stocks forming a topping pattern? Investors await the key NVDA report release.
Tuesday’s trading session didn't change much, with the S&P 500 index opening slightly lower and closing 0.16% higher. The market continues to trade below the July 16 record high of 5,669.6. The question remains: Is this the beginning of a new leg of the uptrend, making new records for the S&P 500 inevitable, or is it just a retracement of recent declines, signaling a potential medium-term consolidation following record-breaking advances earlier this year?
This morning, the S&P 500 is likely to open 0.1% lower, but all attention will be focused on the quarterly earnings release from NVDA, scheduled to be released after the session closes.
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 improved significantly last week, as shown by Wednesday’s AAII Investor Sentiment Survey, which showed that 51.6% of individual investors are bullish, while only 23.7% of them are bearish – down from 28.9% last week.
The S&P 500 index continues to extend its short-term consolidation, as we can see on the daily chart.
Nasdaq 100: More Uncertainty After Pulling Back from 20,000
The technology-focused Nasdaq 100 approached the 20,000 level last week. Since then, it has been slowly retracing some of its gains. Yesterday, it was as low as 19,369.53 before closing 0.33% higher.
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 0.1% lower in anticipation of the NVDA earnings.
VIX: Lower Again
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 broke below 16 again, 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: More Consolidation
Let’s take a look at the hourly chart of the S&P 500 futures contract. This morning, it’s still trading sideways, remaining above the 5,600 level. On the other hand, resistance is at 5,660-5,670, marked by local highs. It still appears to be in a short-term consolidation, likely forming a topping pattern.
Much will depend on the NVDA quarterly earnings today, which will be released after the session closes.
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
Today’s trading session will likely start virtually flat for the S&P 500 index. The market may continue its consolidation ahead of the NVDA earnings release. It still looks like a topping pattern before a downward correction; however, a bullish scenario cannot be ruled out.
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 extended a consolidation yesterday; NVDA earnings are in focus.
- The market may still be forming a topping pattern.
- In my opinion, the short-term outlook is bearish.
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Paul Rejczak,
Stock Trading Strategist