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Bulls are clearly winning in the short term, but will stock prices break higher?

On Thursday, the stock market extended its short-term uptrend, with the S&P 500 index gaining 0.57% and getting back closer to its recent highs. As mentioned on December 21, “the likely scenario is a consolidation along 4,700-4800”, and, despite last week’s dip below 4,700, this prediction remains accurate.

Yesterday, the market reached a potential resistance level of 4,800, and currently, it looks like it’s going to pause for a moment there. The index is likely to extend a consolidation following the November-December rally. How can we capitalize on such trading action? It’s better to shorten the timeframe of the trades and look for buying opportunities at support levels and selling at resistance levels.

Last week, the S&P 500 sold off, reaching its lowest point on Friday since December 13 - the day that marked a pivotal shift in the Fed’s monetary policy, and yesterday, the market went back closer to the recent local highs. It’s getting closer to the January 4, 2022, all-time high of 4,818.62 again.

Investor sentiment remains bullish; Yesterday’s AAII Investor Sentiment Survey showed that still, 48.6% of individual investors remain bullish. 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, the S&P 500 futures contract points to a 0.2% lower opening of the stock market after the important Consumer Price Index release. The consumer inflation reading was slightly higher than expected at +0.3% m/m and +3.4% y/y. So, the market may see more consolidation following the November-December rally, as we can see on the daily chart.

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Nasdaq Was Stronger Again

Recently, the technology-focused Nasdaq 100 index was extending its uptrend, reaching a new all-time high of 16,969.17 on Thursday, December 28. On the previous Friday, I wrote, “While it continues to trade above its month-long uptrend line, there are, however, short-term overbought conditions that may lead to a downward correction at some point.”. Indeed, the market experienced a sharp sell-off last week.

On Monday, it bounced sharply, and in two previous trading days, it continued the advance. Yesterday, the Nasdaq 100 closed above last Tuesday’s daily gap down of 16,687-16,758, which is a positive signal. However, if it’s going to break above the 17,000 mark, the question remains open.

VIX Extends Decline

The VIX index, also known as the fear gauge, is derived from option prices. On Friday, it bounced down from the previous highs along 14.0-14.5 level, which was a positive signal. Yesterday, the VIX continued downwards following Monday’s retreat as stock prices extended their gains. Historically, a dropping VIX indicates less fear in the market, and a rising VIX accompanies stock market downturns. However, the lower the VIX, the higher the probability of the market’s downward reversal.

Futures Contract Trades Near Previous Highs

Let’s take a look at the hourly chart of the S&P 500 futures contract. Overnight, it extended the advance, reaching almost 4,840 level. The CPI release pushed the price lower, but it’s still above 4,800 level. On the other hand, the resistance level is at 4,850.

Conclusion

Stocks are likely to open 0.2% lower today, extending the S&P 500’s consolidation below 4,800 level. It’s uncertain whether the market will resume its medium-term uptrend or simply continue trading within a consolidation following the November-December rally. Investors will be waiting for the coming quarterly corporate earnings season, which actually starts tomorrow with pre-session releases from BAC, JPM, UNH, among others.

On December 21, I mentioned that “in a short-term, the market may see some more uncertainty and volatility”, and indeed, there is a lot of uncertainty following an early-December rally and the breakout of the S&P 500 above the 4,700 level. There is still a chance of extending the medium-term uptrend, as no confirmed negative signals have emerged.

For now, my short-term outlook remains neutral.

Here’s the breakdown:

• The S&P 500 is likely to retrace some of its recent advances following today’s consumer inflation release.
• It still appears more like a consolidation than the start of a new uptrend.
• Short-term uncertainty and volatility may favor trading based on support and resistance levels.
• In my opinion, the short-term outlook is neutral.

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