Could a sharp downward reversal from Friday be a trend-changing event?

Friday’s intraday reversal and a negative close for the S&P 500 index (-0.65%) cast a shadow on the short-term bull market. The index reversed lower after reaching yet another new record high of 5,189.26. Nvidia stock, which had been driving recent gains, saw a sharp reversal, plummeting 5.5% from its new record of $974 to around $875, triggering a downturn in the overall market.

On March 1, I mentioned about February, “Despite concerns about stock valuations, the market rallied to new record highs, fueled by hopes of the Fed's monetary policy pivot and the AI revolution.”. And yet, it was the same story again last week. However, on Friday, a much more pronounced profit-taking occurred.

While indexes were hitting new record highs, most stocks were essentially moving sideways. So, the question is – is this a topping pattern before a more meaningful correction? Still, there have been no confirmed negative signals; however, one might consider the possibility of a trend reversal.

Recently, the stock market continued to rally, fueled by advances in a handful of tech sector stocks, but as I wrote on February 7, “We may have to deal with a correction or consolidation of several weeks of advances. With the season of quarterly earnings announcements coming to an end and a series of important economic data, profit taking may follow.” Despite last week’s new record, this still holds true. Nevertheless, such volatility complicates short-term market predictions.

This morning, the S&P 500 futures contract is 0.4% lower, indicating a lower opening for the index. So, the broad stock market is likely to retrace more of its recent advances. Investors will be waiting for the key Consumer Price Index release tomorrow, and that could stabilize prices at some point today.

Last Wednesday, the investor sentiment has improved again; the AAII Investor Sentiment Survey showed that an astounding 51.7% of individual investors are bullish, while only 21.8% of them are bearish. 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 continues to trade above its over month-long upward trend line, as we can see on the daily chart.

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S&P 500 – Almost Unchanged vs. Last Week

Compared to the previous Friday’s closing price, the index lost 0.26%. The market extended its uptrend above the 5,100 level, and it almost reached the 5,200 mark. However, the weekly bar indicates uncertainty, suggesting the market may be topping, though no clearly negative signals are evident yet.

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Nasdaq 100 Sold Off to 18,000

The technology-focused Nasdaq 100 index reached a new record high of 18,416.73 on Friday, but it closed 1.54% lower, retracing the recent advances and getting closer to the 18,000 level again. It remains relatively weaker than the broad stock market, and for now, it looks like a consolidation following a multi-month rally.

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VIX – Closer to 15

The VIX index, also known as the fear gauge, is derived from option prices. In the middle of last week, it remained elevated despite new records for the indexes, and on Friday, it reached as high as 15.50 as stock prices were retracing their advances.

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 Extends Decline

Let’s take a look at the hourly chart of the S&P 500 futures contract. It’s a new series of the contract, hence around 60 points relative advance on Friday (the futures contract prices in the inflation, measured by non-risk assets yield). Today, the market is extending its intraday downtrend from Friday, reaching below 5,170. Potential support level is at around 5,100-5,150.

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Conclusion

The recent trading action was very bullish, with some of the tech stocks rallying to new record highs, the S&P 500 index breaking above 5,100, and the Nasdaq 100 index reaching above the 18,000 mark.

In my February 13 analysis, I noted that, “in the short term, the possibility of a downward correction cannot be overlooked. A quick glance at the chart reveals that the S&P 500 index has recently become more volatile.”. Indeed, the correction occurred pretty fast, with the inflation number contributing to the downturn. However, the market quickly retraced the decline in the following days, and then rallied, led by Nvidia stock after its earnings release. Last week brought more uncertainty, and on Friday, bears took over, leading stock prices lower.

Today, the S&P 500 is likely to open lower again, extending its intraday retreat from Friday. Last Tuesday, I wrote that “The most likely scenario is an extended consolidation at some point, as not all stocks are participating in the rally, and it's driven by a handful of AI-connected ones.” Despite late last week’s record-breaking advance, it remains a probable scenario.

A week ago, in my Stock Price Forecast for March, I noted “So far, stock prices have been trending upwards in the medium to long term, reaching new record highs. The prudent advice one could give right now is to remain bullish or stay on the sidelines if one believes stocks are becoming overvalued and may need a correction. It's likely that the S&P 500 will continue its bull run this month. However, we may encounter a correction or increased volatility at some point as investors start to take profits off the table.”

For now, my short-term outlook remains neutral.

Here’s the breakdown:

• The S&P 500 is likely to extend its Friday’s intraday decline this morning.
• It still appears to be consolidating within an uptrend.
• In my opinion, the short-term outlook is neutral.

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