Friday’s trading session is likely to open lower, with the S&P 500 index expected to dip by 0.6% following Wednesday’s record-breaking rally and Thursday’s consolidation. Yesterday, the index gained 0.23%, remaining close to its new record high of 5,447.25, which was reached on Wednesday after a lower-than-expected CPI reading.

In my forecast for June, I wrote “For the last three months, the S&P 500 index has been fluctuating along new record highs, above the 5,000 level which was broken in February. It looks like a consolidation within a long-term uptrend, but it may also be a topping pattern before some meaningful medium-term correction. What is it likely to do? As the saying goes, 'the trend is your friend', so the most likely scenario is more advances in the future.

However, a negative signal would be a breakdown below the 5,000 level. That would raise the question of a deeper correction and downward reversal. I think that the likelihood of a bullish scenario is 60/40 - a downward reversal cannot be completely ruled out. The market will be waiting for more signals from the Fed about potential interest rate easing, plus, at the end of the month, the coming earnings season may dictate the market moves.”

Investor sentiment much improved, as indicated by the AAII Investor Sentiment Survey on Wednesday, which showed that 44.6% of individual investors are bullish, while 25.7% of them are bearish (down from last week's reading of 32.0%). 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 S&P 500 index remained above the 5,400 level yesterday, as we can see on the daily chart.

Chart

Nasdaq 100 reached new record

The technology-focused Nasdaq 100 index reached a new record high of 19,639.45 yesterday and closed 0.57% higher. It extended its record-breaking rally following economic data and new record highs in AAPL, MSFT, and NVDA stocks. This morning, it is likely to open just 0.2% lower.

Chart

VIX below 12

The VIX index, also known as the fear gauge, is derived from option prices. In late May, it set a new medium-term low of 11.52 before rebounding up to around 15 on correction worries. Last week, the VIX came back towards 12, and yesterday, it was as low as 11.88, signaling even less fear in the market.

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.

VIX

Futures contract: Short-term consolidation

Let’s take a look at the hourly chart of the S&P 500 futures contract. The new series (September) is extending a consolidation along the 5,500 level. For now, it looks like a relatively flat correction of the uptrend. The resistance level is at 5,520, and the support level is at 5,450.

Chart

Conclusion

Where will the market go following the record-breaking rally? The most obvious answer would be a correction of the advance and a retracement of the move from around 5,350 to around 5,450. However, a potential retreat could spark a new wave of demand, thus extending consolidation along new record highs. More pronounced profit-taking action may be coming at some point. Nevertheless, the market is still trading within an uptrend.

Last Friday, I noted “Will the market retrace some of its recent rally? The bearish argument is relatively thin trading, with only a handful of stocks like NVDA, MSFT, or AAPL responsible for the rally. On the other hand, the trend is still upwards, hence further advances are more likely”

For now, my short-term outlook remains neutral.

Here’s the breakdown

  • The S&P 500 is likely to fluctuate following its recent record-breaking advance.

  • Last week, stock prices rebounded and reached new record highs despite mixed data and growing uncertainty.

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


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All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits' employees and associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski's, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits' employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

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