Trading position (short-term; our opinion): no positions are justified from the risk/reward perspective.

Stocks rebounded strongly in the previous week, but have wavered on Friday. Their performance today isn't exactly shaping to be the strongest ever either. So, what is the status of the consolidation, and how will the market most likely proceed when digesting its recent gains?

Let's start with assessment of the weekly price action (charts courtesy of http://stockcharts.com).

Stocks reversed higher last week, and have closed the sizable bearish gap in the process. It doesn't support the bears anymore now. We can consider the November breakout above the upper border of the rising purple trend channel to be practically verified, as prices moved down almost testing it, yet bounced higher since.

The weekly indicators also complement the bullish picture. Both RSI and CCI have moved back into their overbought territories, putting their earlier sell signals to rest. Acting on Stochastics' sell signal flashed in its overbought area would indeed lead to a whipsaw. In short, the weekly indicators continue supporting the bulls.

But stocks retreated on Friday, and the week closed well below the challenged 2020 highs above 3355. Let's finetune the outlook on the daily chart.

Raise your hands if you think we've seen an abandoned baby candlestick formation. It's a bearish three-day pattern that starts with an upswing, then a doji forms above the previous day's close, and finally we get a declining session. That's as close a description of the last three days in stocks as it gets. The implications are bearish.

The evening doji star is another possible way to view the local top. Either of the two answers has a bearish meaning though.

While the daily indicators have curled down, they still keep painting a bullish picture - the CCI's sell signal is over while Stochastics remains on a buy signal. Also, yesterday's volume was lower than what you would expect to see in a strong reversal. These factors point in a direction of a temporary pause in the upswing, which is perfectly consistent with an evolving consolidation.

Today's action sees the index peeking over 3335 as we speak. That's actually encouraging given the renewed and growing coronavirus fears (some might call it reality recognition) - but don't get lulled to sleep by the relative calm. Despite the lower volume, the short-term has a raised bearish risk now. Unless the bearish formation gets invalidated, don't count on strong upswing continuation just yet.

Let's quote our Friday's key observation:

(...) it's our opinion that this is just the beginning of the consolidation. More precisely, shall we rather say correction?

Before summarizing, let's turn to the time-tested measure of volatility - the VIX.

It points in the direction of an upcoming sizable move. But in which direction is it more likely? Taking all the above into account, it's our opinion that it would rather point lower than higher.

This means that we are yet to see a suitable moment to enter long positions from the risk-reward perspective. A better entry point can be facilitated by more pronounced coronavirus fears flare-up. The consolidation of recent gains is underway and the bears' return remains likely in the very near term.

Let's quote our earlier conclusion:

(...) As a reminder, we are in a stock bull market. The strong comeback highlights that we haven't seen reliable signs of a market top - thus, corrections are to be bought. And there is still a good likelihood of us getting one shortly, regardless of the improvement in the indicators. Therefore, staying on the sidelines remains the right course of action right now.

Summing up, the S&P 500 short-term outlook worsened with Friday's downswing and the abandoned baby formation. Unless invalidated, it marks a high likelihood of stocks taking a breather in the upswing, regardless of it being favored by the weekly indicators. While it's true that Friday's reversal volume could have been higher, that doesn't take away much from the downside risks in the coming session(s), which is supported by the VIX examination too. It would still be premature to declare this correction (in time and in price) as over. As a minimum, we can expect continuing consolidation, and increasing bearish involvement not only in the proximity of earlier highs. A favorable setup to get back in on the long side would naturally follow, as the rebound's veracity shows that stock bull market is climbing a wall of worry. In other words, it's alive and well.

Trading position (short-term; our opinion): no positions are justified from the risk/reward perspective. We will keep you informed should anything change, or should we see a confirmation/invalidation of the above.

Thank you.

Monica Kingsley
Stock Trading Strategist
Sunshine Profits - Effective Investments through Diligence and Care