The rebound raises more questions: is it merely an upward correction?

Thursday’s trading session saw a rebound in stock prices, with the S&P 500 index breaking above the 5,300 level and closing 2.30% higher. The market retraced its Wednesday pullback, extending short-term volatility. This morning, stocks are likely to open 0.3% lower, reflecting continued uncertainty.

The investor sentiment worsened this week, as indicated by Wednesday's AAII Investor Sentiment Survey, which showed that 40.5% of individual investors are bullish, while 37.5% of them are bearish – up from 25.2% last week. Given the scale of recent declines, this is understandable; however, over 40% bullish sentiment is still relatively positive and casts doubt on a potential rebound in stocks.

The S&P 500 index retraced some more of its recent declines yesterday, as we can see on the daily chart.

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Nasdaq 100 Is Back Above 18,000

The technology-focused Nasdaq 100 gained 3.06% on Thursday, recovering from Wednesday’s intraday sell-off. This morning, it is expected to open 0.4% lower, with the market remaining below the crucial 18,800 level, marked by recent local lows.

It’s likely that the market will experience a consolidation, although many investors hope for a V-shaped rally from the current levels.

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VIX Pulling Back from 30

The VIX index, a measure of market fear, accelerated its advance on Friday, nearing 30, and on Monday reached as high as 65.73—the highest level since the 2008 financial crisis and the COVID sell-off in 2020. This reflected significant fear in the market. Yesterday, the VIX closed at 23.79, well below the 30 level, reducing market volatility.

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. Conversely, the higher the VIX, the higher the probability of the market’s upward reversal.

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Futures Contract – Failing Rebound?

Let’s take a look at the hourly chart of the S&P 500 futures contract. On Monday it traded as low as 5,120, rebounded to around 5,360 on Wednesday, then pulled back below 5,200 before rebounding to a local high of around 5,370 this morning.

There’ s a lot of volatility, but the market remains well below its recent consolidation above the 5,450 level. For now, this appears to be an upward correction within a downtrend.

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Conclusion

In my Stock Price Forecast for August on Friday, I noted “a sharp reversal occurred, and by the end of the month, the S&P 500 experienced significant volatility following the sell-off. August is beginning on a very bearish note, but the market may find a local bottom at some point.”

Friday’s trading session is likely to open slightly lower, and the market may see further uncertainty. Yesterday’s rebound brought some hope for bulls, but it seems they are not out of the woods yet. The recent sell-off was significant, and it will likely take more time to recover.

There is also a chance that the current advances are merely an upward correction, and the market could revisit its lows at some point. Investors will be awaiting next week’s important releases: the Producer Price Index on Tuesday, followed by the Consumer Price Index on Wednesday.

On Wednesday, I wrote “The most likely scenario appears to be a short-term consolidation, which could take the form of a bottoming pattern (bullish case) or simply a flat correction of the downtrend before another leg lower.” This is still true, as both scenarios seem to remain in play.

My short-term outlook is now neutral.

Here’s the breakdown:

• The S&P 500 index accelerated its sell-off on Monday, reaching its lowest level since early May; since then, the market has been rebounding.
• The market found a short-term bottom, but this may only be temporary; no positive signals are evident.
• 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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