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Stocks: The bull market picture becomes more blurry


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On Friday, the S&P 500 index retreated from its Thursday’s local high of 4,793.30. However, by the end of the day, it rebounded from the daily low of around 4,752 and closed just 0.28% lower. The broad stock market’s gauge continued to trade relatively close to its January 4, 2022, all-time high of 4,818.62. Investors’ sentiment remains bullish; however, last Wednesday’s AAII Investor Sentiment Survey showed that 46.3% of individual investors remain bullish, which is lower than the previous reading of 52.9%.

As mentioned on the previous Friday, maintaining a bullish bias is still justified, and the market may have another opportunity to reach new high. However, it’s crucial to pay close attention to the trading action, as there could be more uncertainty and volatility ahead. Friday’s volatility and today’s pre-market weakness show some short-term negative signals; therefore I have decided to close the profitable long position at the opening of today’s cash market’s trading session.

The market has been extending the uptrend since the release of the FOMC Statement on December 13, which marked a pivot in the Fed’s monetary policy. In early December, the S&P 500 broke above the late July local high of around 4,607, resuming a rally from the local low of 4,103.78 on October 27.

This morning, the S&P 500 futures contract is indicating a lower opening of the trading session, currently 0.6% below the Friday’s close. The market is poised to extend its Friday’s short-term correction. As mentioned the previous Thursday, “the likely scenario is a consolidation along 4,700-4800”, and this prediction is proving accurate. 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.
On Friday, it became obvious that the 4,800 level will be a strong resistance, as we can see on the daily chart.

Nasdaq 100 broke below uptrend line

The technology-focused Nasdaq 100 index extended its uptrend last week, reaching a new all-time high of 16,969.17 on Thursday. On 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.”, and it seems that the correction may be starting to unfold. So it’s time to be more cautious, especially considering the elevated bullish sentiment readings mentioned before.

Chart

Futures contract dips below 4,800

Let’s take a look at the hourly chart of the S&P 500 futures contract. This morning, it’s trading below the 4,800 level, influenced by weakness in Europe, a stronger U.S dollar, among other factors. The resistance level is now at 4,800, and the support level is at 4,750, marked by the recent local low.

Chart

Conclusion

I decided to close the profitable long position at the opening of today’s cash market’s trading session. Last week, it added more gains, but the market’s volatility, some technical overbought conditions, and the overall bullish sentiment show that it’s time to be more cautious as there may be a more pronounced downward correction at some point. The index has gained 777 points since opening that trade at 3,992.4 on Feb. 27. In the near future, I will shift focus to a more short-term oriented trading strategy. For now, my short-term outlook is neutral and I think that no positions are justified from the risk/reward point of view.

Stocks will likely extend their Friday’s downward correction this morning, as the S&P 500 futures contract is trading 0.6% lower. In the previous Thursday’s analysis, 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 uptrend, as no confirmed medium-term negative signals have emerged. However, the short-term market picture is more blurry right now, and indexes may be beginning their downward correction.

Here’s the breakdown:

  • The S&P 500 is poised to retrace more of its recent advances this morning.

  • Nevertheless, it remains relatively close to its medium- and long-term highs.

  • 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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