Trading position (short-term, my opinion; S&P 500 futures contract): In my opinion, the short-term outlook is neutral, and no positions are currently justified from the risk/reward point of view.

The S&P 500 closed below 4,700 level. Is it still just a correction?

The stock market began the year on a very weak note, but currently, it appears to be just a correction of December’s advances. The S&P 500 index may also be entering a consolidation after a significant uptrend that started in November from the 4,100 level. On Tuesday, I closed my medium-term long position on the S&P 500 contract because Friday's volatility and market weakness before Tuesday's opening suggested the possibility of a larger pullback. Nevertheless, I think that the medium-term uptrend is not reversing at the moment.

On Thursday, the S&P 500 index only lost 0.34%, but it extended a short-term downtrend and broke below the 4,700 level. The market dipped its December 20 local low of around 4,698, marking the lowest point since December 13, the day that marked a pivot in the Fed’s monetary policy. In early December, the S&P 500 broke above the late July local high of around 4,607, resuming a rally from the medium-term local low of 4,103.78 on October 27. Yesterday, investors continued to take profits off the table following last week’s rally. The index bounced off the 4,800 level and the resistance marked by January 4, 2022, all-time high of 4,818.62.

Investor sentiment remains bullish; Wednesday’s AAII Investor Sentiment Survey showed that 48.6% of individual investors remain bullish, surprisingly higher than the previous reading of 46.3%. 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 futures contract is trading 0.3% lower, after higher-than-expected monthly jobs data (Nonfarm Payrolls came in at +216,000 vs. expectations of +168,000). Improving economic data may raise questions about anticipated interest rate cuts by the Fed. Consequently, the S&P 500 index is likely to further extend its drop. Later in the day, it may see a rebound, though.

As mentioned the previous Thursday, “the likely scenario is a consolidation along 4,700-4800”, and, despite yesterday’s dip below 4,700, this prediction is still proving accurate. How can we capitalize on such trading action? It’s better to shorten the timeframe of the trades and look for buying opportunities at support levels and selling at resistance levels.
The index retraced some more of its December rally yesterday, as we can see on the daily chart.

Tech Sector Is Still Weaker

The technology-focused Nasdaq 100 index extended its uptrend last week, reaching a new all-time high of 16,969.17 on Thursday. On Friday, I wrote, “While it continues to trade above its month-long uptrend line, there are, however, short-term overbought conditions that may lead to a downward correction at some point.”. Indeed, the market is experiencing a sharp sell-off this week. Although it still appears to be just a downward correction, caution is advised, as there are no confirmed buying signals at present.

VIX Remains Close to Previous Highs

The VIX index, also known as the fear gauge, is derived from option prices. Yesterday, it continued to trade above 14. The higher it is, the greater the fear in the market. Currently, the index is approaching its local highs from November and December. Breakout higher could indicate a deeper correction or a new downtrend. It's worth noting that historically, a rising VIX accompanies a falling index and vice versa.

Apple Keeps Going Down

Let’s move on to an individual stock – Apple, which is one of the most important market movers. On Friday, it failed to continue its short-term advance after rebounding from $191 level, and on Tuesday it experienced a sharp sell-off. The decline has been significant, suggesting a change in trend. Yesterday, the price went even lower, approaching the $180 level. The $200 price level remains an important medium-term resistance level here.

Futures Contract Went Closer to 4,700

Let’s take a look at the hourly chart of the S&P 500 futures contract. This morning, it’s extending its downtrend following the mentioned better-than-expected monthly jobs data. The support level is now at 4,700, with resistance at 4,750.

Conclusion

Stocks are likely to extend their recent declines this morning as sentiment worsened following economic data releases. However, the market may see a rebound later in the day. In the previous Thursday’s analysis, I mentioned that “in a short-term the market may see some more uncertainty and volatility”, and indeed, there is a lot of uncertainty following an early-December rally and the breakout of the S&P 500 above the 4,700 level. There is still a chance of extending the medium-term uptrend, as no confirmed negative signals have emerged. However, the short-term market picture is currently more blurry, and indexes have begun their downward correction or the mentioned consolidation.

In light of the recent market’s volatility, technical overbought conditions, and the prevailing bullish sentiment, I decided to cash profits in from a long position at the opening of Tuesday’s cash market’s trading session. Overall, it gained 752.8 index points from the opening level of 3,992.4 on Feb. 27.

In the near future, I will shift focus to a more short-term oriented trading strategy. For now, my short-term outlook remains neutral and I think that no positions are justified from the risk/reward point of view.

Here’s the breakdown:

• The S&P 500 is under pressure again, as better economic data may impact the Fed’s dovish stance.
• The market is still close to the important 4,700 level.
• Short-term uncertainty and volatility may favor trading based on support and resistance levels.
• In my opinion, the short-term outlook is neutral, and no positions are justified from the risk/reward point of view.

As always, we’ll keep you, our subscribers, well-informed.

Trading position (short-term, my opinion; S&P 500 futures contract): In my opinion, the short-term outlook is neutral, and no positions are currently justified from the risk/reward point of view.

Thank you.

Paul Rejczak,
Stock Trading Strategist
Sunshine Profits: Effective Investments through Diligence and Care