Will Stocks Reach New Highs?

The stock market extends a consolidation. Is this just a pause before another leg up?

Stocks continued sideways on Wednesday, with the S&P 500 index closing 0.16% higher. The market extended its short-term consolidation following a retreat from last Thursday’s new record high of 5,505.53. Today, the index is likely to open 0.1% lower, as indicated by futures contracts, thus poised to extend uncertainty. It remains relatively close to record highs, and for now, it only looks like a relatively flat correction of the uptrend.

In my forecast for June, I wrote “For the last three months, the S&P 500 index has been fluctuating along new record highs, above the 5,000 level which was broken in February. It looks like a consolidation within a long-term uptrend, but it may also be a topping pattern before some meaningful medium-term correction. What is it likely to do? As the saying goes, 'the trend is your friend', so the most likely scenario is more advances in the future.

However, a negative signal would be a breakdown below the 5,000 level. That would raise the question of a deeper correction and downward reversal. I think that the likelihood of a bullish scenario is 60/40 - a downward reversal cannot be completely ruled out. The market will be waiting for more signals from the Fed about potential interest rate easing, plus, at the end of the month, the coming earnings season may dictate the market moves.”

The investor sentiment remained basically unchanged yesterday, as indicated by the AAII Investor Sentiment Survey, which showed that 44.5% of individual investors are bullish, while 28.3% of them are bearish (up from last week's reading of 22.5%). 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 index is still going sideways after breaking its upward trend line, as we can see on the daily chart.

Will Stocks Reach New Highs? - Image 1

Nasdaq 100 Slowly Rebounding

Last Thursday, the technology-focused Nasdaq 100 index reached a new record high of 19,979.93, before retracing the advance and closing lower. On Friday and Monday, the market traded lower, but since Tuesday, it has been rebounding, reaching as high as 19,763.5 yesterday. This morning, the Nasdaq 100 is poised to open 0.2% lower and is likely to go sideways for some time.

Will Stocks Reach New Highs? - Image 2

VIX Remaining Below 13

The VIX index, also known as the fear gauge, is derived from option prices. In late May, it set a new medium-term low of 11.52 before rebounding up to around 15 on correction worries. Since Thursday, it has been closing above the 13 level, showing increasing fear in the market. On Tuesday and yesterday, the VIX closed below 13 on hopes that a correction in stocks may be ending.

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.

Will Stocks Reach New Highs? - Image 3


Futures Contract – More Fluctuations

Let’s take a look at the hourly chart of the S&P 500 futures contract. Last Thursday, it reached a new high of around 5,588. Since then, the market has been fluctuating with the support level at around 5,520. On the other hand, the resistance is at 5,550. This morning, it continues sideways despite important economic data, including the GDP and Unemployment Claims numbers.

Will Stocks Reach New Highs? - Image 5


Thursday’s trading session is likely to begin on a slightly negative note, with the S&P 500 index declining 0.1%. The market continues trading sideways after Thursday’s intraday retreat, and the question remains: has the uptrend reversed? For now, it is still a consolidation. It seems that the market may go sideways for some time. Investors will be waiting for the important Core PCE Price Index release tomorrow.

For now, my short-term outlook remains neutral.

Here’s the breakdown:

  • The S&P 500 reversed lower from a new record high on Thursday; this week, it is extending a consolidation.
  • Recently, stock prices were reaching new record highs despite mixed data and growing uncertainty.
  • In my opinion, the short-term outlook is neutral.

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Thank you.

Paul Rejczak,
Stock Trading Strategist