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 backed off following inflation data. Will economic data and earnings releases push them higher again?

Thursday’s trading session was volatile, as the market reacted to higher-than-expected Consumer Price Index release. The session started on a negative note, but bulls soon took over, leading the S&P 500 to its new medium-term high of 4,798.50. Before the close, the index retraced some of that rally, finishing 0.07% 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.

Yesterday, the market rebounded from the resistance level of 4,800, and currently it looks like it’s going to extend a consolidation following November-December rally. 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.

Last week, the S&P 500 sold off, reaching its lowest point on Friday since December 13 - the day that marked a pivotal shift in the Fed’s monetary policy, and yesterday, the reached a new yearly high, getting closer to the January 4, 2022, all-time high of 4,818.62 again.

Investor sentiment remains bullish; Wednesday’s AAII Investor Sentiment Survey showed that still, 48.6% of individual investors remain bullish. 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 0.1% lower, indicating slightly lower to neutral opening of the S&P 500 index. The Producer Price Index came in lower than expected at -0.1%, compared to the expected +0.1% m/m. However, the focus is shifting towards earnings releases, and today, we've seen generally worse-than-expected earnings from the largest banks.

The market may see some more consolidation following November-December rally, as we can see on the daily chart.

Nasdaq Failed to Reach New High

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, and later it continued the advance. On Wednesday, the Nasdaq 100 closed above the last Tuesday’s daily gap down of 16,687-16,758, which was a positive signal, and yesterday, it went as high as 16,898. However, the question of whether it will break the 17,000 mark remains open.

VIX Closed Lower 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 extended their gains. 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.

Apple – Still Very Far From Highs

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, the most recognized AI play, which reached new all-time high of $553.46 yesterday before closing 0.9% lower. As for Apple, a potential resistance level remains at $188-190.

Futures Contract Trades Above 4,800

Let’s take a look at the hourly chart of the S&P 500 futures contract. Yesterday, it approached its previous high of around 4,840. However, this level still stands as the nearest important resistance, and today, the market is trading virtually flat after bouncing from 4,800. The support level is also at 4,780.

Conclusion

Stocks are expected to open 0.1% lower today, further extending the S&P 500’s consolidation below the 4,800 level. It’s uncertain whether the market will resume its medium-term uptrend or simply continue trading within a consolidation following November-December rally. Investors will be waiting for more quarterly corporate earnings releases. Today’s releases from the largest banks showed that not everything looks great there.

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.

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 a consolidation following mixed economic data and earnings releases.
• It still 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