S&P 500: Are stocks ready for a deeper correction?

Shares saw a decline on Thursday, closing down 0.74% after hitting a new record high of 4,341.88 early in the day. Initially, the market rallied following the NVIDIA (NASDAQ:) earnings release, but soon the bears took over, pushing prices lower. However, NVDA gained more than 9%, while most of the market was in liquidation.

Is this a downside reversal or just quick profit taking? Today, the market is expected to gain 0.3% at the open, as indicated by futures. There could be more uncertainty on both sides of the market, and it appears consolidation could extend a little further.

Investor sentiment has improved, as indicated by Wednesday’s AAII Investor Sentiment Survey, which showed that 47.0% of individual investors are optimistic, while 26.3% of them are bearish. AAII sentiment is a contrarian indicator in the sense that very bullish numbers can suggest excessive complacency and a lack of fear in the market. Conversely, bearish readings are favorable for a market recovery.

The S&P 500 broke its uptrend line yesterday, as can be seen on the daily chart.

Nasdaq 100 – From new record to profit taking

The tech-focused index hit a new record high of 18,907.54 yesterday, before closing down 0.44%. For now, this looks like a short-term correction following the recent rally. Today, the Nasdaq 100 is expected to open up 0.2%.

The VIX rebounded from a new multi-year low

The , also known as the fear gauge, is derived from option prices. At the end of March, it was trading around level 13. However, market volatility led to a rise in the VIX, which on April 19 reached a local high of 21.4, the highest since late October, signaling fear of walk. Recently it has fallen again, and yesterday it was at its lowest since November 2019 at 11.52, before bouncing back around 1:40 p.m.

Historically, a falling VIX indicates less fear in the market, and a rising VIX accompanies stock market declines. However, the lower the VIX, the higher the likelihood of a downward market reversal.

NVDA hits new records against the market

:

“NVDA stock is likely to exit a near-term consolidation when it reports quarterly results today after the close of trading.”

Yesterday, it hit a new record high of $1,063.2, closing up 9.32%. However, the stock retraced much of its intraday advance. This morning, it is likely that it will open up 1.0%, but the question arises: is this a top trend before more pronounced profit taking? It’s hard to say; However, if the stock falls back below $1,000, it could fuel a correction for the broader market.

Futures bouncing to around 5,300

Let’s take a look at the hourly chart of the contract. Yesterday, it retreated from a new high of around 5,368. It was down almost 100 points, and this morning the market is rebounding; however, for now, it looks like an upward intraday correction. The resistance level is at 5,300 and the support level is at 5,260-5,280, among others.

Conclusion

The S&P 500 index should open slightly higher this morning; however, for now it looks like a rebound after yesterday’s relatively large drop. The market may fluctuate before the long holiday weekend.

Yesterday I wrote:

“No confirmed negative signals are evident as investor sentiment remains elevated. However, This overly bullish sentiment, coupled with weak VIX numbers, could be worrisome for stocks in the near term. Profit taking could be on the horizon.»

Thursday’s trading session saw some obvious profit-taking as the broader stock market fell despite a rally in NVDA shares.

In my May stock price forecast, I noted:

“Where will the market go in May? There is a popular saying: “Sell in May and leave,” but statistics do not consistently support such clear seasonal trends or cycles. The safe bet for May is probably a sideways trade, as investors digest recent data suggesting that inflation may not be transitory and that the Fed may maintain its relatively tight monetary policy. However, economic data is not entirely negative and strong corporate profits could continue to fuel the bull market.

For now, my short-term outlook remains neutral.

Here is the breakdown:

• The S&P 500 fell to a new record yesterday; it is difficult to say whether this is a downward reversal or just a quick downward correction.
• On Friday April 19, stock prices were at their lowest since February, indicating a correction in progress in the medium term. Last week, the S&P 500 Index retraced its entire mid-April decline, hitting new record highs above 5,300.
• In my opinion, the short-term outlook is neutral.