Stocks extended their short-term consolidation on Monday, with the S&P 500 index closing 0.32% lower after reaching a new local high of 5,651.62. This was just 18 points below the July 16 record high of 5,669.6. The Dow Jones Industrial Average even reached a new record high yesterday. It closed just 0.16% higher, though.
The question remains: is this the beginning of a new leg of the uptrend, making new records for the S&P 500 inevitable, or is it just a retracement of recent declines, signaling a potential medium-term consolidation following record-breaking advances earlier this year?
This morning, the S&P 500 index is likely to open 0.1% lower, extending its consolidation amid economic data uncertainty, geopolitical worries, and the upcoming NVIDIA (NASDAQ:NVDA) earnings release tomorrow.
Last Wednesday, I wrote:
“Recently, the market has continued to climb following the brief Yen crisis at the start of August, surprising many traders. The question is whether the market will continue to new highs or reverse course and retrace the recent rally. I think there is a chance the market will reverse its course and correct some of the advances, retracing a large part of the rally.”
I opened a speculative short position last Tuesday, August 20.
Investor sentiment improved significantly last week, as shown by Wednesday’s AAII Investor Sentiment Survey, which showed that 51.6% of individual investors are bullish, while only 23.7% of them are bearish – down from 28.9% last week.
The S&P 500 index further extended its short-term consolidation yesterday, as we can see on the daily chart.
Nasdaq 100 Remains Relatively Weaker
The technology-focused Nasdaq 100 approached the 20,000 level last week. On Friday, it recovered some of Thursday’s losses, and yesterday, it came back down, retesting Thursday’s local low of around 19,450.
The resistance level remains around 20,000, marked by the July 17 daily gap down of 20,080.27 to 20,266.51, among others. Today, the Nasdaq 100 is likely to open 0.2% lower.
VIX Is Still Close to 16
On the previous Monday, the VIX index, a measure of market fear, reached a new long-term high of 65.73 - the highest level since the 2008 financial crisis and the COVID sell-off in 2020. This reflected significant fear in the market.
Last Monday, it traded as low as 14.46 following a rebound in stock prices. Since then, the VIX has been rising again, reaching a high of 18.06 on Thursday. Yesterday, it remained close to 16, indicating no change in volatility.
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. Conversely, the higher the VIX, the higher the probability of the market’s upward reversal.
Futures Contract Extending a Consolidation
Let’s take a look at the hourly chart of the S&P 500 futures contract. This morning, it’s trading sideways, remaining above the 5,600 level. On the other hand, the resistance level is at 5,660-5,670, marked by local highs. It still appears to be in a short-term consolidation, likely forming a topping pattern.
Much will depend on the NVDA quarterly earnings tomorrow, which will be released after the session closes. Investors are also awaiting the important CB Consumer Confidence number today at 10:00 a.m.
As I wrote last Wednesday, “The market seems to be heading toward new record highs but is becoming increasingly overbought and susceptible to a short-term correction. The recent volatility suggests a potential shift in the long-term outlook, and the market may be entering a medium-term consolidation.”
Conclusion
The S&P 500 is likely to open slightly lower this morning. The market may further extend its consolidation following the recent rally, and it still looks like a topping pattern before a downward correction. Investors are waiting for the CB Consumer Confidence data at 10:00 a.m. and the NVDA release tomorrow.
I opened a speculative short position in the S&P 500 futures contract last Tuesday, August 20.
For now, my short-term outlook remains bearish.
Here’s the breakdown:
- The S&P 500 index continued sideways yesterday; NVDA earnings are in focus.
- The market may still be forming a topping pattern.
- In my opinion, the short-term outlook is bearish, and a speculative short position is justified from the risk/reward point of view.