Is the Stock Market Forming Medium-Term High?

As stock prices continue to steadily decline, one may wonder: is the uptrend really over?

There is a growing uncertainty in the stock market. Indexes are still very close to their new record highs, but stock prices basically go sideways. So, the question is – is this just a pause within an uptrend or some topping pattern before a more meaningful correction?

On Friday, the S&P 500 index reached a new record high of 5,111.06 before closing virtually flat. Yesterday, it gained 0.17% following Monday’s decline of 0.4%. While there have been no confirmed negative signals, one might consider the possibility of a trend reversal.

Recently, the stock market continued to rally, fueled by advances in a handful of tech sector stocks, but as I wrote on February 7, “We may have to deal with a correction or consolidation of several weeks of advances. With the season of quarterly earnings announcements coming to an end and a series of important economic data, profit taking may follow.” Despite late last week's rally, this still holds true. Nevertheless, such volatility complicates short-term market predictions.

This morning, the S&P 500 futures contract is down by 0.4%, indicating a lower opening for the index. Investors are waiting for more economic data releases. Today, we received a slightly worse-than-expected GDP number. Tomorrow, the market will closely watch for the crucial Core PCE Price Index release, among others.

The investor sentiment has improved a bit last week; Wednesday’s AAII Investor Sentiment Survey showed that 44.3% of individual investors are bullish, while 26.2% 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.

Following Nvidia's quarterly earnings report last Thursday, the S&P 500 rallied, but on Friday, it experienced more uncertainty and sideways trading action. Since then, the index has been on a steady decline, nearing the 5,050 level as of yesterday. Despite this decline, it remains well above a month-long upward trend line, as we can see on the daily chart.

Is the Stock Market Forming Medium-Term High? - Image 1

Nasdaq 100 Remains Close to 18,000

On Friday, the technology-focused Nasdaq 100 index reached a new all-time high at 18,091.62 - 50 points above the previous high from February 12. However, the market failed to remain above 18,000, and this week, it has been trading sideways.

After the last Wednesday's market close, Nvidia released its quarterly report, which was better-than-expected, and significant for the hot AI sector. This news triggered a substantial rally and marked a record increase in market capitalization for Nvidia, a company nearing the $2 trillion mark. On Friday, Nvidia's stock reached yet another new record; this morning, it is expected to open 1.0% lower, extending a correction.

Is the Stock Market Forming Medium-Term High? - Image 2

VIX – Further Declines

The VIX index, also known as the fear gauge, is derived from option prices. Last Friday, it dropped below the 14 level. Despite weakness in stocks on Monday, it remained flat, and yesterday, it broke below the 13.50 level. Nonetheless, it is still notably above its recent lows from November to February, indicating that the market fears a downward correction at some point.

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 the Stock Market Forming Medium-Term High? - Image 3


Futures Contract Continues to Trade Below 5,100

Let’s take a look at the hourly chart of the S&P 500 futures contract. On Friday, it reached a new record high of around 5,120, and this week, it’s trading below the 5,100 level. It still appears to be trading within a consolidation. The support level remains at 5,060, marked by the recent highs.

Is the Stock Market Forming Medium-Term High? - Image 5


The recent trading action was very bullish, with some of the tech stocks rallying to new record highs, the S&P 500 index breaking above 5,100, and the Nasdaq 100 index testing the 18,000 mark. In my previous Tuesday's analysis, I noted that, “in the short term, the possibility of a downward correction cannot be overlooked. A quick glance at the chart reveals that the S&P 500 index has recently become more volatile.”. Indeed, the correction occurred pretty fast, with the inflation number contributing to the downturn. However, the market quickly retraced the decline in the following days, and last week, it rallied to a new record high on Nvidia news.

This week, the index retraced some of its rally from late last week. It remains to be seen whether this retracement marks the top, at least in the short term.

The S&P is likely to open lower today, slightly extending its short-term correction. The most likely scenario remains an extended consolidation, as not all stocks are participating in the rally, and it's driven by a handful of AI-connected ones.

For now, my short-term outlook remains neutral.

Here’s the breakdown:

  • The S&P 500 is expected to retrace more of its recent record-breaking advances.
  • A longer consolidation phase may ensue, following an extended rally over the past months.
  • In my opinion, the short-term outlook is neutral.

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Thank you.

Paul Rejczak,
Stock Trading Strategist