S&P 500 at late December low: Breakdown or rebound?

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 believe that the medium-term uptrend is not reversing at the moment. It’s crucial to pay close attention to the trading action, as there could be more uncertainty and volatility ahead.

Yesterday, the S&P 500 index closed 0.80% lower, approaching the 4,700 level, with the daily low at 4,699.71. The sell-off ended near the previous local low from December 20 (4,697.82). Investors continued to take profits off the table following last week’s rally, causing the market to bounce from the 4,800 level and the resistance marked by January 4, 2022, all-time high of 4,818.62.

Investor sentiment remains bullish; the yesterday’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 market has been extending the uptrend since the release of the FOMC Statement on December 13, which 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 local low of 4,103.78 on October 27.

This morning, the S&P 500 futures contract is indicating a virtually flat opening of the trading session, currently unchanged compared to Wednesday’s close. The market has slightly weakened after better-than-expected ADP Non-Farm Employment Change and Unemployment Claims releases. Improving economic data may raise questions about anticipated interest rate cuts by the Fed.

As mentioned the previous Thursday, “the likely scenario is a consolidation along 4,700-4800”, and this prediction is 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.
Yesterday, the index approached a potential support level marked by the late December local low, as we can see on the daily chart.

Nasdaq 100 still showing weakness

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 approaches previous highs

The VIX index, also known as the fear gauge, is derived from option prices. 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.

Futures contract is below 4,750

Let’s take a look at the hourly chart of the S&P 500 futures contract. This morning, it’s trading slightly below the 4,750 level, The resistance level remains at 4,800, with support at 4,750, marked by the recent local low. If the market breaks lower, the next support level could be at around 4,700.

Conclusion

In light of the recent market’s volatility, technical overbought conditions, and the prevailing bullish sentiment, I decided to close the profitable 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.

Stock prices are expected to open virtually flat this morning, however, the sentiment worsened following better-than-expected jobs data. 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 uptrend, as no confirmed medium-term negative signals have emerged. However, the short-term market picture is more blurry right now, and indexes may be beginning their downward correction or the mentioned consolidation.

In the coming days, the market will await more important economic data. Today we received the better-than-expected ADP Non-Farm Employment Change number, and tomorrow, the Nonfarm Payrolls, Unemployment Rate, and ISM Services PMI releases are scheduled.

Here’s the breakdown

• The S&P 500 is likely to fluctuate following its recent declines.

• The market is currently within a 4,700-4,800 consolidation range.

• Short-term uncertainty and volatility may favor trading based on support and resistance levels.

• In my opinion, the short-term outlook is neutral.

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