Is Profit-Taking Looming for Stocks?

Stock prices continue sideways ahead of the data tomorrow. Is this a topping pattern?

Stock prices went sideways again yesterday, with the S&P 500 index gaining 0.09% and remaining slightly above the 5,300 level. Last Thursday, it reached a new record high of 5,325.49 following its breakout above the 5,250 level on Wednesday, breaking the previous local highs from March and early April.

Last Monday, I noted ”The question arises: will the S&P 500 continue its bull market and reach a new record? It seems more and more likely; however, the index may see some short-term uncertainty as it approaches a series of the previous local highs and resistance levels.”

The S&P 500 index is likely to open virtually flat this morning, as indicated by the futures contract which is gaining 0.05%.

On Friday, I wrote “The most likely intraday scenario is more sideways trading action. Some investors seem to be taking profits off the table, yet no confirmed negative signals are evident.” It seems that today, it will be the same case again.

Investor sentiment remained high last week, as indicated by the Wednesday’s AAII Investor Sentiment Survey, which showed that 40.9% of individual investors are bullish, while only 23.3% of them are bearish. The AAII sentiment is a contrary indicator in the sense that highly bullish readings may suggest excessive complacency and a lack of fear in the market. Conversely, bearish readings are favorable for market upturns.

The S&P 500 remains elevated following its rally last week, as we can see on the daily chart.

Is Profit-Taking Looming for Stocks? - Image 1

Nasdaq 100 – New Record High

The technology-focused Nasdaq 100 index reached a new record high of 18,703.83 on Monday, closing 0.69% higher, outperforming the broader stock market. It was led by AAPL and NVDA, among others.

The market will be waiting for the very important quarterly earnings from NVDA scheduled to be released tomorrow after the session closes.

Is Profit-Taking Looming for Stocks? - Image 2

VIX Remains Close to 12

The VIX index, also known as the fear gauge, is derived from option prices. In late March, it was trading around the 13 level. However, market volatility led to an increase in the VIX, and on April 19, it reached a local high of 21.4 - the highest since late October, signaling fear in the market. Recently, it was going lower again, and on Friday, it was as low as 11.91, showing much complacency in the market. Yesterday, the VIX continued to move along 12.

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.

Is Profit-Taking Looming for Stocks? - Image 3

Futures Contract Trading Sideways

Let’s take a look at the hourly chart of the S&P 500 futures contract. On Thursday, it pulled back from a new all-time high of around 5,349 and has been fluctuating since then. For now, it looks like a relatively flat correction of the uptrend. The resistance level is at 5,350, with support at 5,300, among others.

Is Profit-Taking Looming for Stocks? - Image 5


Stock prices will likely extend their short-term consolidation this morning. For now, it looks like a relatively flat correction within an uptrend. The market is waiting for the important FOMC Meeting Minutes release and quarterly earnings from NVDA tomorrow.

The S&P 500 remains close to a new record high, and no confirmed negative signals are evident as investor sentiment remains elevated. However, that overly bullish sentiment, coupled with low VIX readings, may be worrying for stocks in the short term. Some profit-taking may be on the horizon.

On May 7, I wrote “(…) the market may pause or even retrace some gains. With most of the earnings season over (there is only one very important release left - NVDA on May 22) and the FOMC Rate Decision release behind us, expect a period of uncertainty.”

In my Stock Price Forecast for May, I noted “Where will the market go in May? There's a popular saying: 'Sell in May and go away,' but statistics don't consistently support such clear seasonal patterns or cycles. The safe bet for May is likely sideways trading, with investors digesting recent data suggesting that inflation may not be transitory, and the Fed could maintain its relatively tight monetary policy. However, economic data isn't entirely negative, and strong earnings from companies may continue to fuel the bull market.”

For now, my short-term outlook remains neutral.

Here’s the breakdown:

  • The S&P 500 is likely to further extend its short-term consolidation this morning.
  • On Friday, April 19, stock prices were the lowest since February, indicating a correction of the medium-term advance. Last week, the S&P 500 retraced all of its mid-April sell-off, reaching a new record high above 5,300.
  • In my opinion, the short-term outlook is neutral.

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Thank you.

Paul Rejczak,
Stock Trading Strategist