Stocks: Dip-Buying Opportunity or Trap?

With stock prices going lower yesterday, the question remains: is this a topping pattern?

Stock prices declined on Wednesday, with the S&P 500 index closing 0.74% lower after breaking below the 4,300 level again. The market retraced its Tuesday rebound, ending the day near last week’s local low of around 4,257.

Last Thursday, stock prices sold off after a higher open, despite NVDA stock rallying by over 9% following its earnings release. On Friday, the market rebounded, and since then it has been basically moving sideways.

Last Friday, I asked “Is this a downward reversal or just quick profit-taking?” There was still a chance that it was only a flat correction and a consolidation within an uptrend. However, yesterday’s trading session gave bears hope of a downward reversal.

This morning, the S&P 500 index is expected to open 0.2% lower, after recovering from overnight lows following a better-than-expected GDP number release.

Investor sentiment worsened, as indicated by the AAII Investor Sentiment Survey yesterday, which showed that 39.0% of individual investors are bullish (a decrease from last week's reading of 47.0%), while 26.7% 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.

The S&P 500 has been fluctuating after breaking below the upward trend line, remaining above the important 4,250 level, as we can see on the daily chart.

Stocks: Dip-Buying Opportunity or Trap? - Image 1

Nasdaq 100 Extended a Consolidation

Last Thursday, the technology-focused Nasdaq 100 index reached a new record high of 18,907.54 before closing lower. Since Friday, it has been gaining again; however, yesterday, it retraced that advance. This morning, it is likely to open 0.1% lower.

Stocks: Dip-Buying Opportunity or Trap? - Image 2

VIX Broke Higher

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, market volatility led to an increase in the VIX, and on April 19, it reached a local high of 21.4 - the highest since late October, signaling fear in the market.

Recently, it was declining again, and on Thursday, it reached its lowest point since November 2019 at 11.52. However, yesterday, the VIX closed above the 14 level, indicating increased fear in the market.

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.

Stocks: Dip-Buying Opportunity or Trap? - Image 3


Futures Contract Trading Below Last Week’s Low

Let’s take a look at the hourly chart of the S&P 500 futures contract. Last Thursday, it pulled back from a new record high of around 5,368 and fell by almost 100 points. Friday saw a rebound, and on Tuesday, the market was as high as 5,339. However, this morning, it traded near 5,250 following yesterday’s declines and overnight uncertainty. The support level is at 5,200-5,220, and the resistance is now at 5,300.

Stocks: Dip-Buying Opportunity or Trap? - Image 5


Stocks took a downturn yesterday, with the market nearing a local low from last Thursday. Today, the S&P 500 is expected to open slightly lower after recovering from overnight lows due to some better-than-expected economic data.

It’s hard to tell if the recent price action was just a flat correction of the uptrend or a topping pattern before a downward reversal. For now, it looks like another potential profit-taking action following recent record-breaking advances. However, a decisive breakdown of the 5,250 support level, which was marked by local highs from March and April, would likely lead to a deeper correction of the advance from the early May local lows.

In my Stock Price Forecast for May, I noted “Where will the market go in May? There's a popular saying: 'Sell in May and go away,' but statistics don't consistently support such clear seasonal patterns or cycles. The safe bet for May is likely sideways trading, with investors digesting recent data suggesting that inflation may not be transitory, and the Fed could maintain its relatively tight monetary policy. However, economic data isn't entirely negative, and strong earnings from companies may continue to fuel the bull market.”

For now, my short-term outlook remains neutral.

Here’s the breakdown:

  • The S&P 500 is likely to open slightly lower, extending uncertainty following its recent fluctuations; it remains above the important 5,250 level.
  • On Friday, April 19, stock prices were the lowest since February, indicating a correction of the medium-term advance. Recently, the S&P 500 retraced all of its mid-April sell-off, reaching new record highs above 5,300.
  • In my opinion, the short-term outlook is neutral.

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Thank you.

Paul Rejczak,
Stock Trading Strategist