Stocks: Mixed Signals, Consolidation Extending

More uncertainty may be ahead of economic data, earnings releases - which direction is next?

Stocks didn’t do much on Wednesday, with the S&P 500 index trading around the 5,200 level and closing 0.11% higher. This week, the market retraced its recent advances after hitting a new record high of 5,264.85 on Friday. For now, it looks like another consolidation within an uptrend.

On Tuesday, 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.”

The investor sentiment has slightly worsened this week, as indicated by yesterday’s AAII Investor Sentiment Survey, which showed that 47.3% of individual investors are bullish, while only 22.2% 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.

This morning, the S&P 500 is likely to open higher, with the futures contract trading 0.4% above its yesterday’s closing price. Consequently, the index will retrace some of its recent decline. On Tuesday and yesterday, it briefly broke its two-month-long upward trend line, as we can see on the daily chart.

Stocks: Mixed Signals, Consolidation Extending - Image 1

Nasdaq 100 Rebounding from the Trend Line

On March 21, the technology-focused Nasdaq 100 index reached a new record high of 18,464.70, extending its long-term uptrend, and last week, it retraced closer to the 18,200 level. On Tuesday, the market broke below the recent trading range, returning to its over month-long consolidation. Yesterday, it rebounded from the upward trend line, and this morning, it is likely to retrace some more of the declines.

Stocks: Mixed Signals, Consolidation Extending - Image 2


VIX Remains Elevated

The VIX index, also known as the fear gauge, is derived from option prices. Last week, it has been trading along the 13 level, and this week, it rebounded to the 15.50 level as stocks were retracing some of their recent advances.

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: Mixed Signals, Consolidation Extending - Image 3


Futures Contract Bounces Towards 5,300

Let’s take a look at the hourly chart of the S&P 500 futures contract. Yesterday, it dropped to the support level of around 5,250, marked by the early March local highs. This morning, it is rebounding from that support, getting closer to 5,300 again. The resistance level is at 5,300-5,320. For now, it looks like a short-term consolidation.

Stocks: Mixed Signals, Consolidation Extending - Image 5


Today’s trading session is likely to open on a positive note, with the S&P 500 index extending an intraday rebound from yesterday. Investors will be awaiting the release of important monthly jobs data tomorrow.

More pronounced profit-taking action may be in cards at some point. However, as of now, there have been no confirmed negative signals.

On Tuesday, 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.” It appears that profit-taking has indeed occurred. 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 continue consolidating after a higher opening of the trading session.
  • In the medium term, stock prices remain somewhat overbought, suggesting the potential for a correction.
  • In my opinion, the short-term outlook is neutral.

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Thank you.

Paul Rejczak,
Stock Trading Strategist