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.

Stocks fluctuated following Monday’s rally. Thursday's CPI data remains in focus.

Tuesday’s trading session wasn’t a game-changer, as the S&P 500 index retraced some of its 1.4% advance from Monday, closing just 0.15% lower. As mentioned on December 21, “the likely scenario is a consolidation along 4,700-4800”, and, despite last week’s dip below 4,700, this prediction remains 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.

On Monday, the market retraced most of last week’s decline as expectations of monetary policy easing quickly resurfaced following remarks from FOMC Members. Last week, it sold off, reaching its lowest point on Friday since December 13 - the day that marked a pivotal shift in the Fed’s monetary policy. Yesterday the market went back closer to the recent local highs and important 4,800 level.

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. Last week, investors were taking profits off the table following the previous 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; Last 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. The next AAII sentiment reading will be released later today.

This morning, stocks are expected to open virtually flat, with the S&P 500 futures contract remaining unchanged. The market may see further consolidation ahead of the important Consumer Price Index release tomorrow. The index continues its consolidation following November-December rally, as we can see on the daily chart.

Nasdaq Was Relatively Stronger

Recently, the technology-focused Nasdaq 100 index was extending its uptrend, reaching a new all-time high of 16,969.17 on Thursday, December 28. On the previous 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 experienced a sharp sell-off last week.

On Monday, it bounced sharply, yet it still remains relatively weaker than the broad stock market gauge. However, yesterday it showed some signs of improvement, closing 0.17% higher. The Nasdaq 100 approached last Tuesday’s daily gap down of 16,687-16,758, and it is likely to face some selling pressure there.

VIX Down Again

The VIX index, also known as the fear gauge, is derived from option prices. On Friday, it bounced down from the previous highs along 14.0-14.5 level, which was a positive signal. Yesterday, the VIX continued downwards following Monday’s retreat as stock prices rebounded from intraday lows. Historically, a dropping VIX indicates less fear in the market, and rising VIX accompanies stock market downturns.

Apple Still Trying to Rebound

Let’s move on to an individual stock – Apple, which is one of the most important market movers. Last week, it experienced a sharp sell-off. The decline has been significant, suggesting a change in trend. On Monday, I wrote that “(…) the stock approached a potential support level of around $180.” and “The market may see a rebound here.”. This prediction held true, however, Apple remains relatively weak compared to the surging Nvidia stock, which gained 1.7% yesterday, following its Monday’s rally of 6.4%. Nvidia reached yet another new all-time high. As for Apple, a potential resistance level remains at $188-190.

Futures Contract Trades Close to 4,800

Let’s take a look at the hourly chart of the S&P 500 futures contract. It recently bounced from the 4,700 level, and is currently trading along the 4,800 level. The market continues to consolidate following its December rally. The resistance level is at 4,800-4,820, and support is at 4,760, among others.

Conclusion

Stocks are likely to open virtually flat today, keeping the S&P 500 index near its local highs from Monday and Tuesday. It’s uncertain whether the market will resume its medium-term uptrend or simply continue trading within a consolidation following November-December rally. Investors are eagerly anticipating tomorrow's important Consumer Price Index release, as previous releases have resulted in increased market volatility.

On December 21, 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.

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 likely to extend its short-term consolidation ahead of tomorrow’s consumer inflation data.
• In the near term, stocks may extend a rebound, but it currently appears more like a consolidation than the start of a new uptrend.
• 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