Stocks set to open lower: Is the downtrend resuming?

The stock market is likely to give back some of yesterday’s gains. Is this just part of a broader consolidation?

The S&P 500 index closed 0.58% higher on Tuesday as investors awaited quarterly earnings reports from META and TSLA, both scheduled for release after the market close. Both stocks initially moved higher in response to their results, but the broader market pulled back overnight, largely amid reports that the U.S.-Iran military conflict could be reignited. As a result, the S&P 500 is expected to open 1.0% lower.

Investor sentiment has deteriorated, as reflected in yesterday’s AAII Investor Sentiment Survey, which reported that 36.9% of individual investors are bullish, while 45.8% are bearish.

The S&P 500 continues to trade near its upward trendline, as shown on the daily chart.

S&P 500 futures contract: Moving back toward 7,700

This morning, the S&P 500 futures contract is trading lower after reversing its rebound.

Resistance is currently at 7,760, while support is at 7,680-7,700, among other levels.

Market outlook: Extending a months-long consolidation

The S&P 500 is likely to give back some of yesterday’s gains this morning, potentially moving back below the 7,700 level.

So far, price action suggests that the index is extending the consolidation that began in early August.

Investors are awaiting further quarterly earnings reports from major corporations due next week.

Here's what I think is most likely:

• The S&P 500 index is likely to retrace yesterday’s advance, potentially testing recent lows again.
• My Volatility Breakout System is currently short in the market.

For individual investors, this environment calls for careful position management. While the market continues to advance, the combination of low volatility, seasonal weakness signals, and stretched valuations suggests that defensive positioning may become increasingly important in the weeks ahead.