Stocks have broken below their recent range. Is this the start of a new downtrend?
Stock prices corrected some of their recent rally yesterday, with the S&P 500 index closing 0.60% lower and moving away from the 6,000 level. It pulled back to last Thursday’s gap-up range of approximately 5,936–5,947, and this morning it is set to open 0.5% lower, closing that daily gap. Currently, this appears to be a correction of the post-election, record-breaking rally.
Investor sentiment has improved this week, as indicated by Wednesday’s AAII Investor Sentiment Survey, which reported that 49.8% of individual investors are bullish, while 28.3% of them are bearish.
The S&P 500 was the lowest since last Thursday, as we can see on the daily chart.
Nasdaq 100 Pulled Back Below 21,000
The Nasdaq 100 index closed 0.66% lower yesterday, breaking the 21,000 level. Today, it’s likely to open 0.8% lower following AMAT’s earnings report, which provided lower-than-expected future guidance. Support for the Nasdaq 100 index is around 20,600, marked by previous highs.
VIX Remained Near 14
The VIX index, a measure of market volatility, declined by over 20% last Wednesday, and has moved along the 15 level since. On Wednesday and yesterday, it continued to decline, moving below the 14 level. This confirmed risk-on sentiment and a lack of 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: Consolidation Following Declines
Yesterday, the S&P 500 futures contract dropped below the 6,000 level, reaching a local low of around 5,931. The market retraced more of last week's rally but continues to trade above previous highs. Support is at 5,900–5,920, marked by late October’s local highs, while resistance is at 5,980–6,000.
Conclusion
The S&P 500 index is likely to open lower today, extending yesterday’s decline. The key question is whether this is merely a correction of the rally or the start of a new downtrend leading to a full retracement. Currently, it appears to be a downward correction, as the market remains well above its mid-October local highs.
Earlier this week, I noted that “this week could see a period of increased volatility or consolidation,” and this has played out as expected. The market broke lower yesterday, likely extending its consolidation/ correction range.
In my Stock Price Forecast for November 2024, I wrote “The key question is: Will this sell-off mark the start of a medium-term downtrend, or is it merely a downward correction within an uptrend? For now, it appears to be a correction, but next week’s presidential elections could add to volatility.”
For now, my short-term outlook is neutral.
Here’s the breakdown:
- The S&P 500 retraced part of its post-election rally; it looks like a downward correction.
- The market has likely entered a period of increased volatility.
- In my opinion, the short-term outlook is neutral.
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Thank you.
Paul Rejczak,
Stock Trading Strategist