Stocks to extend rebound before Fed, earnings?

Stocks were gaining on Friday, fueled by the Thursday’s earnings releases from two big tech companies – GOOG and MSFT. The S&P 500 index opened with a gap up and closed 1.02% higher, near the 5,100 level. It was the highest since April 15 when it sold off after a failed rebound attempt.

On previous Friday, the index hit a new medium-term low of 4,953.56. This marked its lowest level since late February, with a decline of over 311 points or 5.9% from the record high of 5,264.85 on February 28. Last week, stock prices rebounded as tensions in the Middle East somewhat eased, and investors shifted their focus to the quarterly earnings releases.

In my Stock Price Forecast for April, I noted, “Closing the month of March with a gain of 3.1%, the question arises: Will the S&P 500 further extend the bull market in April, or is a downward correction on the horizon? From a contrarian standpoint, such a correction seems likely, but the overall trend remains bullish.”

Last week, the sentiment worsened again, as indicated by the Wednesday’s AAII Investor Sentiment Survey, which showed that only 32.1% of individual investors are bullish, while 33.9% of them are bearish. 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, stocks are likely to open higher, as indicated by the futures contract gain of 0.3%. The market will get back above 5,100 level, likely extending its Friday’s advance, as we can see on the daily chart.

S&P 500 rebounded by 2.7% last week

Compared to the previous Friday’s closing price, the index gained 2.67%, retracing most of its previous week’s sell-off of over 3%. On April 12, I wrote that “Short-term consolidation near the new records may suggest that the market is potentially topping out, though no clearly negative signals are evident yet.” Indeed, the market topped out, breaking below its upward trend line, and accelerated a short-term downtrend. It’s worth noticing that the index bounced from a support level of around 5,000, as we can see on the weekly chart.

Earnings pushed Nasdaq 100 higher

Recently, the technology-focused Nasdaq 100 index broke the 18,000 level, and on previous Friday, it briefly dipped below the 17,000 level, reaching a local low of 16,973.94.

Last Friday, it gained 1.65%, retracing more of the recent decline. However, it continues to trade below the 18,000 level. Today, the Nasdaq 100 index is likely to open 0.4% higher. Investors will be waiting for another series of key earnings releases – AMD and AMZN tomorrow, and AAPL on Thursday.

VIX dipped to 15

The VIX index, also known as the fear gauge, is derived from option prices. In late March, it was trading around the 13 level. However, recent market volatility has led to an increase in the VIX. On previous Friday, it reached a high of 21.4, the highest since late October, indicating fear in the market. Last week, it was retracing that advance, reaching the 15 level on Friday.

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.

Futures contract extending gains above 5,100

Let’s take a look at the hourly chart of the S&P 500 futures contract. On Thursday, the market sold off to a local low of around 5,022 in a reaction to Wednesday’s earnings release from META, and on Friday it rebounded following earnings from GOOG and MSFT. This morning, it is extending the advance, with a potential resistance level at 5,160.

Conclusion

The S&P 500 index rebounded last week, fueled mainly by the quarterly earnings releases from big tech companies. Recently, it was extending a correction from the March 28 record high of 5,264.85 on Middle East tensions, strong U.S. dollar. On previous Friday, it sold off below the important 5,000 level, and last week, it retraced a large part of the declines. This morning, it's set to open higher by 0.3%, although sideways trading may precede more earnings reports and the important Fed release on Wednesday.

Last Wednesday, I wrote “Was it an upward reversal? It still looks like an upward correction or consolidation following an almost 6% decline from the recently acquired new record high.

However, it might be a time for cautious optimism, as earnings releases appear to be driving stock prices higher.”

While earnings reports offer cause for cautious optimism, it remains uncertain whether last week's gains signify a true upward reversal or simply a correction of recent declines.

On April 2, I wrote that “In April, we will see a usual series of important economic data, but with the Fed leaning towards easing monetary policy, we should perhaps pay more attention to the quarterly earnings season. However, good earnings may be met with a profit-taking action this time. The market appears to be getting closer to a correction.”

Then, I added: “It appears that profit-taking is happening. Is this a new downtrend? Likely not, however, a correction towards 5,000-5,100 is possible at some point.”

For now, my short-term outlook remains neutral.

Here’s the breakdown:

• The S&P 500 is poised to continue its Friday rally today, but uncertainty looms with the Fed meeting on Wednesday and more earnings releases.

• On Friday, April 19, stock prices were the lowest since February, indicating a correction of the medium-term advance.

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

The full version of today’s analysis - today’s Stock Trading Alert - is bigger than what you read above, and it includes the additional analysis of the Apple (AAPL) stock and the current S&P 500 futures contract position. I encourage you to subscribe and read the details today. Stocks Trading Alerts are also a part of our Diamond Package that includes Gold Trading Alerts and Oil Trading Alerts.

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