S&P 500: Uncertainty Following Recent Sell-Off

Stocks trade sideways. Is this a bottoming pattern or just pause before another leg down?

Tuesday’s trading session didn’t change much as stocks slightly extended their short-term downtrend, with the S&P 500 index closing 0.21% lower. On Monday, a failed rebound led to another decline and a breakdown below the 5,100 level. Yesterday, the market basically went sideways.

In my Stock Price Forecast for April, I noted, “Closing the month of March with a gain of 3.1%, the question arises: Will the S&P 500 further extend the bull market in April, or is a downward correction on the horizon? From a contrarian standpoint, such a correction seems likely, but the overall trend remains bullish.”

Last week, the investor sentiment slightly worsened, as indicated by the AAII Investor Sentiment Survey, which showed that 43.4% of individual investors are bullish, while 24.0% 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.

Today, the market is likely to open slightly higher, as indicated by the futures contract 0.2% advance. The S&P 500 will continue trading below the 5,100 level. In early April, the index broke its two-month-long upward trend line, as we can see on the daily chart.

S&P 500: Uncertainty Following Recent Sell-Off - Image 1

Nasdaq 100 Closed Flat

Recently, the technology-focused Nasdaq 100 index sold off below the 18,000 level, and yesterday, it was the lowest since mid-February, slightly extending its short-term downtrend. However, it still looks like a consolidation following a medium-term advance.

The Nasdaq 100 is likely to open 0.2% higher this morning. Investors will be waiting for the coming earnings releases from big tech companies. Tomorrow, we will get a report from NFLX.

S&P 500: Uncertainty Following Recent Sell-Off - Image 2

VIX Remains Elevated

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, recent market volatility has led to an increase in the VIX. On Friday, it surpassed 19, and this week, it remains relatively high – the highest since late October.

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: Uncertainty Following Recent Sell-Off - Image 3


Futures Contract Consolidates Along 5,100

Let’s take a look at the hourly chart of the S&P 500 futures contract. This morning, it’s still trading along the 5,100 level. The resistance level is at around 5,120, and the support is at 5,080. The market has been in a slight downtrend since the start of the month, and on Monday, it accelerated the move.

S&P 500: Uncertainty Following Recent Sell-Off - Image 5


The S&P 500 index accelerated its downtrend on Monday, extending a correction from the March 28 record high of 5,264.85. Investor sentiment worsened on Middle East tensions, strong U.S. dollar. Yesterday, the market moved sideways. This morning, it is likely to open slightly higher and extend consolidation. Is this a short-term bottoming pattern? It’s hard to say. For now, it looks like a flat correction of the downtrend. Therefore, it's prudent to adopt a defensive approach and refrain from attempting to buy the dips in the near future.

On April 2, I wrote that “In April, we will see a usual series of important economic data, but with the Fed leaning towards easing monetary policy, we should perhaps pay more attention to the quarterly earnings season. However, good earnings may be met with a profit-taking action this time. The market appears to be getting closer to a correction.”

Then, I added: “It appears that profit-taking is happening. Is this a new downtrend? Likely not, however, a correction towards 5,000-5,100 is possible at some point.”

For now, my short-term outlook remains neutral.

Here’s the breakdown:

  • The S&P 500 is likely to extend a consolidation following Friday’s-Monday’s sell-off.
  • Stock prices are the lowest since late February, indicating a correction of the medium-term advance.
  • In my opinion, the short-term outlook is neutral.

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Thank you.

Paul Rejczak,
Stock Trading Strategist