S&P 500 to Rally on Nvidia, but Will It Last?

Sentiment is very bullish again; however, profit-taking action may ensue at some point.

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.”

Yesterday, the S&P 500 index bounced from a new local low of 4,946.00 after retracing more of its last week’s advances and a rebound from the last Tuesday’s local low of 4,920.31, closing 0.13% higher.

So, the market kept confirming my February 7 analysis, as it is basically was going sideways after reaching new record high of 5,048.39 on February 12. Last week, the market was rebounding, and it was on its way to re-test the all-time high; however, Friday’s producer inflation data halted that rally.

This morning, bulls are striking back with a vengeance after yesterday’s quarterly earnings release from Nvidia. The stock is trading higher by 13% in the pre-market, with global markets rallying to their record highs. The S&P 500 futures contract is 1.3% higher, indicating that the index will get close to its record high.

The investor sentiment has improved a bit; yesterday’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.

Last Tuesday, 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 that line. The previous highs and lows from January acted as support levels around 4,900, leading to a rally, but on Tuesday, the index came back below 5,000, as we can see on the daily chart.

S&P 500 to Rally on Nvidia, but Will It Last? - Image 1

Nasdaq 100 – Lower Low

Last Monday, the technology-focused Nasdaq 100 index reached a new all-time high at 18,041.45, but by Tuesday, it sold off below the 17,500 level. In the subsequent days, it began retracing the decline, but on Friday, the tech stocks' gauge reversed lower again. Yesterday, it dipped below 17,400; however, it closed off its daily lows (-0.38%), and today it is poised to retrace most of the recent declines on the Nvidia release.

After the session’s close, the market received Nvidia's quarterly report, crucial for the hot AI sector. Recently the stock has been retracing its over month-long rally from the early January low of $473.20. Yesterday, I wrote that “If the market continues downward, key support levels to monitor are $600 and $660”, and indeed, the stock bounced from the daily low of $662.48, just before releasing the report and rallying to new record highs.

S&P 500 to Rally on Nvidia, but Will It Last? - Image 2

VIX Moving Along 15

The VIX index, also known as the fear gauge, is derived from option prices. Last Tuesday, it broke above the previous local highs of around 15.00-15.50, peaking at 18 before retracing towards 14 as stocks bounced back. On Tuesday and yesterday, it climbed again amid renewed market correction fears; however, today it is likely to go down substantially.

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 to Rally on Nvidia, but Will It Last? - Image 3


Futures Contract Is Close to Record High Again

Let’s take a look at the hourly chart of the S&P 500 futures contract. The market is back above the 5,050 level this morning. As for now, it appears to be consolidating within a relatively wide trading range of 4,950-5,050. The support level is at 5,000-5,020.

S&P 500 to Rally on Nvidia, but Will It Last? - 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 last 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

Friday’s session showed that not everything points to new record highs, and the market may experience some more uncertainty and consolidation. While the index extended a short-term correction on Tuesday and yesterday, this morning it is poised to move closer to the record high, driven by a rally in tech stocks led by Nvidia.

The S&P is likely to open 1.3% higher, almost reaching the record high just below the 5,050 level. However, it may experience an intraday downward correction or consolidation at some point. The most likely scenario is 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 likely to reach a new record high this morning; however, profit-taking action cannot be ruled out at some point.
  • 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