Stocks are likely to resume the downtrend. Where will the S&P 500 reach?

Stocks rebounded on Tuesday, with the S&P 500 index reaching a local high of around 5,585 but ultimately closing 0.16% lower after retracing the intraday advance. On Friday, the market set a local low at 5,497.04, and yesterday, it retraced some of the recent declines. On Monday, the rebound was driven by weekend news about Joe Biden’s decision to quit the election race, and yesterday, the market kept advancing ahead of the earnings releases.

This morning, the sentiment is much worse following yesterday’s earnings announcements from GOOG and TSLA. The S&P 500 index is likely to open 0.9% lower, as indicated by futures contracts.

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 rebounded from its June consolidation and the crucial 5,500 level on Monday, as we can see on the daily chart.

(Click on image to enlarge)

Nasdaq 100: a Failed Rebound?

On Monday, the technology-focused Nasdaq 100 index rebounded from Friday’s local low of 19,479.38, reaching as high as 19,904.60 yesterday. However, yesterday’s session closed 0.35% lower, and this morning, the Nasdaq 100 is likely to re-test its Friday’s low, following the mentioned earnings releases yesterday. 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.

VIX Remained Close to 15

The VIX index, a measure of market fear, has recently been hovering around the 12-13 level, indicating relatively low fear. However, since last Thursday, it has been approaching the 17 level, confirming a downward correction in the stock market. Yesterday, the VIX fluctuated along the 15 level (the chart seems to have a glitch with the lowest reading below 11 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: Back at its Friday’s Low

Let’s take a look at the hourly chart of the S&P 500 futures contract. This morning, it’s trading lower, retracing Monday’s-Tuesday’s rebound. So, the nearest important support level is at around 5,540-5,550. The next one is at 5,500-5,520, marked by local lows from late June.

(Click on image to enlarge)

Conclusion

The S&P 500 is expected to open 0.9% lower today, retracing most of its recent rebound following the earnings releases from GOOG and TSLA. The first stock is trading over 4% lower in the pre-market and the second one is over 8% lower.

Yesterday, I wrote “The S&P 500 index rebounded yesterday, but was it an upward reversal or just a correction following recent declines? For now, it looks like a correction. The next market direction will likely be determined by the upcoming quarterly earnings releases (…) Overall, yesterday’s rebound wasn’t much of a game-changer, and it seems likely that we will see new lows in the near future.”

This proved accurate as stocks are likely to extend their downtrend. However, investors will be waiting for a series of economic data: the Flash PMIs release today at 9:45 a.m., the Advance GDP tomorrow, and the Core PCE Price Index on Friday. They could lead to some volatility.

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

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