S&P 500 Retraced Last Week's Rally – Is the Correction Over?

Stocks sold off after inflation data, but is a quick bounce that followed bullish?

The release of the Consumer Price Index (CPI) yesterday led to a pull-back in the S&P 500 index. The reported CPI figure was 0.1% higher than anticipated, at +0.3% month-over-month. This unexpected increase led to a sell-off across various asset classes, including stocks, bonds, and precious metals, while strengthening the U.S. dollar.

Recently, stocks continued to rally, fueled by advances in a handful of tech sector stocks, but as I wrote last Wednesday, “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.”

This morning, futures contracts indicate that stocks are likely to open 0.5% higher, retracing some of yesterday's losses. Notably, the S&P 500 index rebounded from an intraday low of 4,920.31, ultimately closing at 4,953.17 (-1.37%).

Investor sentiment remained elevated last week; the AAII Investor Sentiment Survey on Wednesday showed that 49.0% of individual investors are bullish, while only 22.6% 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.

Yesterday, I mentioned, "The market may return to a month-long upward trend line, currently around 4,950", and indeed, the S&P 500 did just that, briefly dipping below the line before rebounding to that precise level. The previous highs and lows from January could potentially act as support levels around 4,900, as we can see on the daily chart.

S&P 500 Retraced Last Week's Rally – Is the Correction Over? - Image 1

Nasdaq 100 Pulls Back from 18,000

On Monday, the technology-focused Nasdaq 100 index reached a new all-time high at 18,041.45. Recently, it has been relatively weaker than the broader stock market, but last week, it caught up with the S&P 500. However, Nasdaq’s rally was led by a handful of “FANG” stocks like META, NVDA and MSFT. Last Wednesday, I wrote about the NYSE FANG+ index. Yesterday, it experienced a sharper decline than the S&P 500, closing 1.58% lower and also at its month-long upward trend line.

S&P 500 Retraced Last Week's Rally – Is the Correction Over? - Image 2

VIX - Breakout Above Recent Highs

The VIX index, also known as the fear gauge, is derived from option prices. Last week, it fell below the 13 level, indicating a lack of fear in the market as stock prices reached record highs. However, yesterday, it broke above the previous local highs of around 15.00-15.50, peaking at 18. By the end of the trading day, the VIX began to retreat as stock prices rebounded.

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 Retraced Last Week's Rally – Is the Correction Over? - Image 3


Futures Contract Bounces to 5,000

Let’s take a look at the hourly chart of the S&P 500 futures contract. Yesterday, the market sold off at 8:30 a.m., following the CPI announcement. However, it had already begun to retreat from its record high. Yesterday’s low was around of 4,940, and this morning, the market bounced back to the 5,000 level. The resistance level is now at 5,020, with support level at 4,980, among others.

S&P 500 Retraced Last Week's Rally – Is the Correction Over? - 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 5,000, and the Nasdaq 100 index getting close to 18,000. In my analysis yesterday, 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.

This morning, the market is likely to retrace a part of yesterday’s decline, with the S&P poised to open 0.5% higher. In the short term, we can expect consolidation and an increased volatility. The index will likely fluctuate around support and resistance levels as investors seek to capitalize on profits following the rally from last year's late October low.

For now, my short-term outlook remains neutral.

Here’s the breakdown:

  • The S&P 500 is likely to bounce by 0.5% at the opening of today’s trading session.
  • A 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