Has the market reached a bottom on Friday? Is holding a short position still justified?

Friday’s trading session was another bearish one, with the S&P 500 index retracing more of its early July advances and closing 0.71% lower. The market kept selling off despite an overnight rebound in futures contracts. The index went back to the 5,500 level, setting a daily low at 5,497.04. This morning, the sentiment is quite bullish following weekend news regarding Joe Biden’s decision to quit the election race. The futures contracts trade 0.6% higher, indicating a higher opening for the index.

On July 09, I opened a speculative short position in S&P 500. This position is currently profitable.

Investor sentiment increased significantly last Wednesday, as indicated by the AAII Investor Sentiment Survey, which showed that 52.7% of individual investors are bullish, while 23.4% of them are bearish.

As I mentioned in my stock price forecast for July, “While more advances remain likely, the likelihood of a deeper downward correction also rises. Overall, there have been no confirmed negative signals so far, but the May gain of 4.8% and June gain of 3.5% suggest a more cautionary approach for July (…) The market will be waiting for the quarterly earnings season in the second half of the month. Plus, there will be a series of economic data, including the CPI release on July 11, the Advance GDP number on July 25, and the FOMC Rate Decision on July 31.”

The S&P 500 index approached its June consolidation and the important 5,500 level, as we can see on the daily chart.

S&P 500: 2% Lower in a Week

Compared to the previous Friday’s closing price, the index lost 1.97%, breaking its winning streak and retracing almost two weeks of advances. Last Monday, I wrote that “there are signs that the market is getting ready for a correction or a consolidation” and it proved correct. Last week’s retracement may be the beginning of a more pronounced correction, or a consolidation following months of rallying.

(Click on image to enlarge)

Nasdaq 100 Remained Relatively Weaker

The technology-focused Nasdaq 100 index has further extended its short-term downtrend, breaking below its three-month-long upward trend line and closing 0.93% lower. However, this morning, the futures contract is rebounding from the 19,500 level, indicating a 1.0% higher opening for the index. The important resistance level remains at 20,000.

On the previous Thursday, I concluded that “There are short-term overbought conditions, and the market is likely to top at some point.” This proved accurate with the recent sharp downward reversal and a sell-off last week.

(Click on image to enlarge)

VIX Kept Advancing on Friday

The VIX index, a measure of market fear, has recently been hovering around the 12-13 level, indicating relatively low fear. However, on Thursday and Friday it was reaching closer to 17 level following earlier advances. It was confirming a downward correction in the stock market (the chart seems to have a glitch with lowest reading below 11).

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.

(Click on image to enlarge)

Futures Contract: Change of Trend or Just a Rebound?

Let’s take a look at the hourly chart of the S&P 500 futures contract. This morning, it is rebounding above its recent local lows of around 5,570. For now, it looks like an upward correction of the short-term downtrend. The resistance level is at 5,600-5,620, and the support level is at 5,550.

(Click on image to enlarge)

Conclusion

With the sentiment improving this morning, the market is about to enter an upward correction, consolidation or, maybe, an upward reversal and the change of the trend? For now, it is likely that the advance is only a correction following recent declines. However, one cannot exclude a bullish scenario here. The market will be waiting for a series of earnings releases in the coming two weeks. Tomorrow, we will get numbers from GOOG and TSLA, among others.

My speculative short position in the S&P 500 futures contract, opened on July 9, is currently profitable.

Quoting my stock price forecast for July, “Investors continue pricing in the Fed’s monetary policy easing that is supposed to happen this year. Hence, a medium-term downward reversal still seems a less likely scenario. However, the recent record-breaking rally may be a cause for some short-term concern as a downward correction may be coming.”

For now, my short-term outlook remains bearish.

Here’s the breakdown:

• The S&P 500 index kept selling off on Friday, but this morning, it is likely to retrace some of the declines.
• Investors are waiting for quarterly earnings releases.
• In my opinion, the short-term outlook is bearish.

More By This Author:

Stocks: Is The Rotation Preceding A Downtrend?
Stocks: More New Highs, But A Correction May Be Looming
S&P 500: CPI Led To Profit Taking – Is The Top In?