The market is in a waiting mode ahead of Wednesday’s CPI and Fed releases. Will profit-taking occur?

Despite the important monthly jobs data release, stocks didn’t move much on Friday, with the S&P 500 index closing 0.11% lower. However, the market reached a new record high of 5,375.08 before retracing its intraday advance. Today, futures contracts are pointing to a 0.1% lower opening for the index as markets await key economic data on Wednesday (CPI and the FOMC Rate Decision).

In my forecast for June, I wrote “For the last three months, the S&P 500 index has been fluctuating along new record highs, above the 5,000 level which was broken in February. It looks like a consolidation within a long-term uptrend, but it may also be a topping pattern before some meaningful medium-term correction. What is it likely to do? As the saying goes, 'the trend is your friend', so the most likely scenario is more advances in the future.

However, a negative signal would be a breakdown below the 5,000 level. That would raise the question of a deeper correction and downward reversal. I think that the likelihood of a bullish scenario is 60/40 - a downward reversal cannot be completely ruled out. The market will be waiting for more signals from the Fed about potential interest rate easing, plus, at the end of the month, the coming earnings season may dictate the market moves.”

Investor sentiment remained unchanged last week, as indicated by the AAII Investor Sentiment Survey from Wednesday, which showed that 39.0% of individual investors are bullish, while 32.0% of them are bearish (up from last week's reading of 26.7%). 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 breached its upward trend line on Friday, signaling another short-term pause within an uptrend, as we can see on the daily chart.

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S&P 500 – Weekly Advance

Compared to the previous Friday’s closing price, the index gained 1.32%, retracing the entirety of its previous week’s decline and reaching a new record high.

Quoting an article from May 13: “The recent price action confirmed the importance of the 5,000 level as a medium-term support. It’s hard to say whether the market will continue its long-term uptrend; however, it will most likely remain above 5,000 in the coming weeks or months.”

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Nasdaq 100 at 19,000

The technology-focused Nasdaq 100 index reached a new record high of 19,113.88 on Friday before closing 0.11% lower. On Friday, I wrote “The market may see some more uncertainty, and perhaps, a profit-taking action at some point.” It seems likely that the market will continue sideways until the mentioned data releases on Wednesday.

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VIX Moved Closer to 12

The VIX index, also known as the fear gauge, is derived from option prices. In late May, it set a new medium-term low of 11.52 before rebounding up to around 15 on correction worries. Last week, the VIX came back lower, and on Friday, it was as low as 12.11, signaling less fear in the market.

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.

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Futures Contract – More Uncertainty Around 5,350

Let’s take a look at the hourly chart of the S&P 500 futures contract. On Friday, it set a new record of around 5,386, and this morning, it’s trading along the 5,350 level following Friday’s intraday retreat. For now, it looks like a relatively flat correction of the uptrend. However, a profit-taking action cannot be ruled out at some point. The support level remains at around 5,300-5,320, marked by the recent trading range.

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Conclusion

Monday’s trading session is likely to begin with a very moderate change for the S&P 500 index. In fact, the market may see two days of indecision as investors await the key data on Wednesday: Consumer Price Index and the FOMC Rate Decision. The S&P 500 index is likely to remain relatively close to its recently acquired highs; however, a profit-taking action cannot be ruled out at some point.

On Friday, I noted “Will the market retrace some of its recent rally? The bearish argument is relatively thin trading, with only a handful of stocks like NVDA, MSFT, or AAPL responsible for the rally. On the other hand, the trend is still upwards, hence further advances are more likely”

For now, my short-term outlook remains neutral.

More By This Author:

Jobs Data: Negative Implications For Stocks
S&P 500 Slowly Creeping Higher: Is A New Record Coming?
Stocks: Will A New Record Follow Friday’s Rebound?