The S&P 500 is likely to pull back slightly. Is it forming a topping pattern?
Stock prices essentially moved sideways on Tuesday, with the S&P 500 index closing 0.11% lower. It remained near the 6,200 level after pulling back from Monday’s record high of 6,215.08.
This morning, the S&P 500 is likely to open 0.2% lower, as indicated by futures contracts. I think that this is still a corrective move within an ongoing uptrend.
Investor sentiment has slightly improved, as reflected in last Wednesday’s AAII Investor Sentiment Survey, which reported that 35.1% of individual investors are bullish, while 40.3% are bearish.
The S&P 500 continues to trade within a short-term consolidation, as the daily chart indicates.
Nasdaq 100: Relatively Weaker
The Nasdaq 100 lost 0.89% on Tuesday, pulling back from its record high of 22,721.50 amid weakness in large-cap tech stocks and a sector rotation into financials and so-called “old technology.”
Support for the Nasdaq 100 is around 22,250, marked by the late-February high.
Volatility Remains Low
The Volatility Index (VIX) hit a local low of 16.11 last Thursday - the lowest since February 21 - reinforcing the strength of the equity rally and signaling calmer market conditions. However, despite the continued market advance, the VIX has failed to make new lows recently, which could be a warning sign for bulls.
Historically, a dropping VIX indicates less fear in the market, and a rising VIX accompanies stock market downturns. However, the lower the VIX, the higher the probability of the market’s downward reversal. Conversely, the higher the VIX, the higher the probability of the market’s upward reversal.
S&P 500 Futures Contract Consolidating
This morning, the S&P 500 futures contract is trading slightly below the 6,250 level following a weaker-than-expected ADP Non-Farm Employment Change report (actual: -33,000 vs. expected: +99,000).
Support is around 6,200-6,220, while resistance remains in the 6,250-6,270 zone.
Markets remain highly sensitive to geopolitical developments and could stay volatile in the near term.
Conclusion
The S&P 500 is likely to start Wednesday’s session slightly lower, extending Tuesday’s pullback. Currently, it appears to be a consolidation phase following recent gains.
Yesterday, I noted “I think that in the short term, overbought technical conditions may lead to a period of consolidation or a mild pullback. However, no clear bearish signals are currently evident”. That outlook remains valid.
Here’s the breakdown:
- The S&P 500 continues to fluctuate following its recent rally.
- Monday’s move extended gains for those who bought based on my Volatility Breakout System.
- There are no clear bearish signals yet, but a deeper downward correction is not out of the question at some point.
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Thank you.
Paul Rejczak
Stock Trading Strategist
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