Stocks Extend Gains, but a Correction May Be Looming

This rally has retraced nearly all the declines that led to the panic selling and the August 5 local low of 5,119.26. The market has slightly extended its advance following a much larger-than-expected revision of annual jobs numbers yesterday. This morning, the S&P 500 is likely to open 0.2% higher, potentially leading to a consolidation phase.

Yesterday, I wrote “Recently, the market has continued to climb following the brief Yen crisis at the start of August, surprising many traders. The question is whether the market will continue to new highs or reverse course and retrace the recent rally. I think there is a chance the market will reverse its course and correct some of the advances, retracing a large part of the rally.”

Although there have been no confirmed negative signals, I decided to open a speculative short position on Tuesday.

Last Thursday, I wrote “It still appears to be a correction following a decline that started in mid-July; however, the market may also advance towards a double-top or new highs.” This remains accurate as we could see a medium-term consolidation following early August volatility.

Investor sentiment much improved yesterday, as indicated by the AAII Investor Sentiment Survey, which showed that 51.6% of individual investors are bullish, while only 23.7% of them are bearish – down from 28.9% last week.

The S&P 500 index remained above the 5,600 level yesterday, as we can see on the daily chart.

Nasdaq 100 Getting Closer to 20,000

The technology-focused Nasdaq 100 gained 0.52% yesterday after declining by 0.2% on Tuesday. However, it remains relatively weaker than the broader stock market following the early August sell-off. The index is being driven higher by a few key stocks, including NVDA, which rallied by over 40% from its low point. This is significant given its multi-trillion-dollar market cap.

The resistance level remains around 20,000, marked by the July 17 daily gap down of 20,080.27 to 20,266.51, among others. Today, the Nasdaq 100 is likely to open 0.3% higher.

VIX: Higher Despite Gaining Stocks

Last Monday, the VIX index, a measure of market fear, reached a new long-term high of 65.73 – the highest level since the 2008 financial crisis and the COVID sell-off in 2020. This reflected significant fear in the market. However, it has since been retracing, dropping as low as 14.46 on Monday, indicating much less fear. The VIX has returned to ‘normal’ levels, considering the past few months. Yesterday, though, it traded higher, breaking above the 16 mark.

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. Conversely, the higher the VIX, the higher the probability of the market’s upward reversal.

Futures Contract Trading Near Highs

Let’s take a look at the hourly chart of the S&P 500 futures contract. On Monday, it broke above the 5,600 level, accelerating its uptrend. This morning, it’s breaking the 5,650 level, slightly extending its advance. The resistance level is at 5,700-5,720, marked by previous highs.

As I wrote on Wednesday, “The market seems to be heading toward new record highs but is becoming increasingly overbought and susceptible to a short-term correction. The recent volatility suggests a potential shift in the long-term outlook, and the market may be entering a medium-term consolidation.”

Conclusion

In my Stock Price Forecast for August, I noted “a sharp reversal occurred, and by the end of the month, the S&P 500 experienced significant volatility following the sell-off. August is beginning on a very bearish note, but the market may find a local bottom at some point.”

The rebound from the previous Monday’s low has been significant, and bulls have regained control of the market.

On Friday, I questioned “Will this lead to new record highs? For now, it still seems like a correction within the downtrend. However, if the market breaks above its early August local high, the road to re-test the all-time high will be open.”

Stock prices are likely to open slightly higher this morning. Recently, the S&P 500 broke its August high, which may be a bullish sign, but in the short term, there is an increasing likelihood that the market will reach a top soon. All the attention seems to be focused on the Fed Chair Powell’s speech at the Jackson Hole Symposium tomorrow at 10:00 a.m.

I decided to open a speculative short position in the S&P 500 futures contract on Tuesday.

On the previous Friday, I wrote “(…) rebound brought some hope for bulls, but it seems they are not out of the woods yet. The recent sell-off was significant, and it will likely take more time to recover.

There is also a chance that the current advances are merely an upward correction, and the market could revisit its lows at some point.”

For now, my short-term outlook remains bearish.

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