S&P 500 Near New Yearly High: Will Bulls Sustain Momentum?

Stocks are about to break their recent highs on open, but will the uptrend continue further?

The S&P 500 index went closer to the 4,800 level yesterday as technology stocks rallied ahead of their quarterly earnings releases in upcoming two weeks. It closed 0.88% higher, around 20 points below the recent highs. As mentioned on December 21, “the likely scenario is a consolidation along 4,700-4800”, and this prediction remains accurate. However, this morning, the index is expected to open above the 4,800 mark. The question of whether the uptrend will continue remains open.

In late December and early January, the S&P 500 sold off, reaching its lowest point on Friday since December 13 - the day that marked a pivotal shift in the Fed’s monetary policy, and last Friday, it reached a new yearly high, getting closer to the January 4, 2022, all-time high of 4,818.62 again.

Investor sentiment has slightly worsened; Wednesday’s AAII Investor Sentiment Survey showed that 40.4% of individual investors are bullish, significantly lower than the week ago. 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.

This morning, the S&P 500 futures contract is trading 0.5% higher, indicating positive open for the S&P 500 index. Investors will wait for more important earnings reports next week. This week, we've seen some generally better-than-expected earnings from the largest banks.

The market may see a breakout above its recent highs, as we can see on the daily chart.
S&P 500 Near New Yearly High: Will Bulls Sustain Momentum? - Image 1

Nasdaq Reached New Record High

The technology-focused Nasdaq 100 index reached a new all-time high yesterday at the level of 16,996.98. This morning it is poised to extend the advance and break above the 17,000 level.

Last Monday, it bounced sharply, followed by another advances. On Wednesday, the Nasdaq 100 closed above the last Tuesday’s daily gap down of 16,687-16,758, which was a positive signal. While today’s rally is expected, a correction may occur at some point as the market is currently technically overbought in the short term.S&P 500 Near New Yearly High: Will Bulls Sustain Momentum? - Image 2

VIX Backs Off

The VIX index, also known as the fear gauge, is derived from option prices. A week ago, it bounced down from the previous highs around the 14.0-14.5 level, which was a positive signal. It then traded along its local lows around 12.5. On Wednesday, the volatility index broke above the recent highs following an intraday sell-off in the stock market. Yesterday, it came back below the 14.50 level, marked by the previous local highs.

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.

S&P 500 Near New Yearly High: Will Bulls Sustain Momentum? - Image 3

Futures Contract Is at the High Again

Let’s take a look at the hourly chart of the S&P 500 futures contract. This morning, it approaches its previous high of around 4,840 again. This level recently served as crucial short-term resistance. The next potential resistance level is at around 4,850, and the support level is at 4,800-4,820.

S&P 500 Near New Yearly High: Will Bulls Sustain Momentum? - Image 5

The S&P 500 is likely to break above the recent high this morning. The broad stock market’s gauge may even reach new all-time high today as investor sentiment improves ahead of upcoming quarterly corporate earnings releases, among other factors.

On December 21, I mentioned that “in a short-term the market may see some more uncertainty and volatility”, and indeed, there was a lot of uncertainty following the early-December rally and the breakout of the S&P 500 above the 4,700 level. Today, the market is poised to extend the uptrend; however, a correction may occur at some point.

For now, my short-term outlook remains neutral.

Here’s the breakdown:

  • The S&P 500 may attempt to reach its 2022 all-time high of 4,818.62.
  • Breakout above the recent highs would be a positive signal; however, it’s uncertain whether the market will stay above its recent trading range.
  • Short-term uncertainty and volatility may favor trading based on support and resistance levels.
  • In my opinion, the short-term outlook is neutral.

The full version of today’s analysis - today’s Stock Trading Alert - is bigger than what you read above, and it includes the additional analysis of the Apple (AAPL) stock and the current S&P 500 futures contract position. I encourage you to subscribe and read the details today. Stocks Trading Alerts are also a part of our Diamond Package that includes Gold Trading Alerts and Oil Trading Alerts.

Thank you.

Paul Rejczak,
Stock Trading Strategist