Have stocks reached local highs? Is there any fuel left for the rally?
Stocks kept advancing on Friday, with the S&P 500 index reaching a new local high of 5,561.98 and closing 0.20% higher. The market has retraced almost all of its losses from the August 1 local high of 5,566.16. The rebound surprised a majority of traders and the question remains: Will the market go straight to new highs, or will it reverse at some point and retrace the rally? For now, there have been no confirmed negative signals; S&P 500 futures suggest a likely 0.1% higher open this morning.
On Thursday, I wrote “It still appears to be a correction following a decline that started in mid-July; however, the market may also advance towards a double-top or new highs.” This remains accurate as we could see a medium-term consolidation following early August volatility.
Investor sentiment improved, as indicated by last Wednesday's AAII Investor Sentiment Survey, which showed that 42.5% of individual investors are bullish, while 28.9% of them are bearish – down from 37.5% last week.
The S&P 500 index approached its August 1 local high on Friday, as we can see on the daily chart.
S&P 500 Rallied by 4% Last Week
Compared to the previous Friday’s closing price, the index gained 3.93%, breaking above the 5,500 level and retracing most of its losses from the mid-July record high of 5,669.67. In the short term, the market may be nearing a downward correction, but overall, the medium-term outlook remains very bullish.
Nasdaq 100 Remained Near 19,500
The technology-focused Nasdaq 100 continued its uptrend last week, reaching the 19,500 level on Thursday. Friday’s trading session saw little change, and this morning, the Nasdaq 100 is likely to open 0.2% higher. The resistance level remains at 19,500-19,550, marked by the August 1 local high of around 19,539.
VIX Fluctuating Along 15
Last 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. This reflected significant fear in the market. However, since then, it has been retracing, and on Friday, it dropped as low as 14.65, indicating much less fear.
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: Closer to Previous High
Let’s take a look at the hourly chart of the S&P 500 futures contract. Since Thursday, it has been fluctuating around new local highs, though still below the 5,600 level and the August 1 local high. For now, it appears to be a relatively flat correction of the uptrend, but it may also be a topping pattern before a downward correction.
Conclusion
In my Stock Price Forecast for August, I noted “a sharp reversal occurred, and by the end of the month, the S&P 500 experienced significant volatility following the sell-off. August is beginning on a very bearish note, but the market may find a local bottom at some point.”
The rebound from the previous Monday’s low has been significant, and bulls have regained control of the market.
On Friday, I questioned “Will this lead to new record highs? For now, it still seems like a correction within the downtrend. However, if the market breaks above its early August local high, the road to re-test the all-time high will be open.”
The S&P 500 is now very close to its early August high, and the market seems to be losing some steam, ready for a consolidation or downward correction. This morning, it is likely to open just 0.1% higher, likely leading to a sideways trading session.
On the previous Friday, I wrote “(…) rebound brought some hope for bulls, but it seems they are not out of the woods yet. The recent sell-off was significant, and it will likely take more time to recover.
There is also a chance that the current advances are merely an upward correction, and the market could revisit its lows at some point.”
My short-term outlook remains neutral.
Here’s the breakdown:
- The S&P 500 index accelerated its short-term uptrend last week; yet, it’s still below the August 1 high.
- Today, the market is likely to go sideways; it’s still far from reversing the uptrend.
- In my opinion, the short-term outlook is neutral.
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Thank you.
Paul Rejczak,
Stock Trading Strategist