Stock prices remain close to their highs. Is this a short-term topping pattern?
Tuesday’s trading session was very mild, as the S&P 500 index remained within the price range from the previous day. Investors sentiment is still bullish ahead of the upcoming quarterly earnings releases and the expected monetary policy easing by the Fed this year.
On Friday, stock prices broke above their month-long trading range, invalidating any potential medium-term topping pattern scenarios. On Monday, I wrote that “in the short term, one would expect some downward correction as the market becomes increasingly overbought”. Despite a new high, it seems that a correction scenario is likely in the near term. The market rallied from its Wednesday’s daily low of around 4,715 – an advance of over 150 points. Of course, it's hard to tell if this marks the peak of a rally, but caution may be advised, as a correction or consolidation could occur at some point.
Surprisingly, investor sentiment slightly worsened - last Wednesday’s AAII Investor Sentiment Survey showed that 40.4% of individual investors are bullish, significantly lower than the previous week. 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, we will get a new reading, and it should be more bullish following the recent rally.
The S&P 500 futures contract is trading 0.6% higher following yesterday’s quarterly earnings release from Netflix. The stock is up 10% in pre-market trading. Consequently, the S&P 500 index is likely to reach a new record high this morning. Investors will be awaiting more important earnings reports. After today's session closes, the market will receive the highly anticipated release from TSLA, and tomorrow, the report from INTC will be released.
The market remains close to its record high, as we can see on the daily chart.
Nasdaq About to Extend the Rally
On Monday, the technology-focused Nasdaq 100 index reached a new all-time high at the level of 17,450.30. This morning it is expected to open 0.9% higher, and is poised to set a new record high in response to the mentioned Netflix stock rally.
In early January, it bounced sharply, followed by another advance and closing above the important daily gap down of 16,687-16,758, which was a positive signal. Consequently, it broke to new record highs last week. However, a correction may occur at some point as the market is currently technically overbought in the short term.
VIX Is Closer to Local Lows
The VIX index, also known as the fear gauge, is derived from option prices. On Thursday, it came back below the 14.50 level, marked by the previous local highs. Subsequently, it continued its decline in response to advancing stock prices. Yesterday, it approached the previous local lows in the 12.00-12.50 range.
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.
Futures Contract Extends Its Advance Above 4,900
Let’s take a look at the hourly chart of the S&P 500 futures contract. This morning, it is gaining after breaking above the 4,900 level. There have been no confirmed negative signals so far; however, the market became increasingly overbought in the short-term. The support level is now at 4,880-4,900, marked by the recent consolidation.
Conclusion
Stocks are about to extend their uptrend again this morning. The S&P 500 is likely to reach the new record high as futures contract is trading 0.6% higher. Investor sentiment remains elevated ahead of upcoming quarterly corporate earnings releases, but the market may see a correction or consolidation at some point.
On December 21, I mentioned that “in a short-term the market may see some more uncertainty and volatility”, and indeed, there was a lot of uncertainty following the early-December rally and the breakout of the S&P 500 above the 4,700 level. However, last Friday’s price action left no illusions of a potential medium-term trend reversal. The market is overbought in the short term, but predicting a correction is currently very challenging.
For now, my short-term outlook remains neutral.
Here’s the breakdown:
- The S&P 500 is poised to reach another new record high this morning.
- The breakout above the recent highs marked a positive signal; however, it’s uncertain whether the market won’t retrace some of the rally. The index may be nearing the peak of a short-term uptrend.
- In my opinion, the short-term outlook is neutral.
The full version of today’s analysis - today’s Stock Trading Alert - is bigger than what you read above, and it includes the additional analysis of the Apple (AAPL) stock and the current S&P 500 futures contract position. I encourage you to subscribe and read the details today. Stocks Trading Alerts are also a part of our Diamond Package that includes Gold Trading Alerts and Oil Trading Alerts.
Thank you.
Paul Rejczak,
Stock Trading Strategist