Will S&P 500 break higher? Focus on earnings releases

Stock prices slightly extended their uptrend on Friday, but the S&P 500 index closed just 0.08% higher despite recent inflation data that indicated likelihood of easing monetary policy in the coming months. However, the market reached a new medium-term high of 4,802.40, before retracing some of the advance. As mentioned on December 21, “the likely scenario is a consolidation along 4,700-4800”, and despite the recent dip below 4,700, this prediction remains accurate.

On Thursday and Friday, the market continued to rebound from the resistance level of 4,800, and currently it looks like it’s going to further extend a consolidation following November-December rally. 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.

In late December and early January, the S&P 500 sold off, reaching its lowest point on Friday since December 13 - the day that marked a pivotal shift in the Fed’s monetary policy, and on Friday, the reached a new yearly high, getting closer to the January 4, 2022, all-time high of 4,818.62 again.

Investor sentiment remains bullish; Last Wednesday’s AAII Investor Sentiment Survey showed that still, 48.6% of individual investors remain bullish. 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.

This morning, the S&P 500 futures contract is trading 0.2% lower. Yesterday it lost 0.1% amid low activity during the long holiday weekend in the U.S. Consequently, the S&P 500 will likely open around 0.3% lower this morning, potentially extending a short-term consolidation below the 4,800 level. Before the opening of today’s trading session we've seen some generally better-than-expected earnings from the largest banks. The market will be awaiting more quarterly corporate earnings announcements.

The market may see more consolidation following November-December rally, as we can see on the daily chart.

Nasdaq went sideways too

Recently, the technology-focused Nasdaq 100 index was extending its uptrend, reaching a new all-time high of 16,969.17 on Thursday, December 28. On December 29, 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.” Indeed, the market experienced a sharp sell-off then.

Last week on Monday, it bounced sharply, and later it continued the advance. On Wednesday, the Nasdaq 100 closed above the last Tuesday’s daily gap down of 16,687-16,758, which was a positive signal, and on Friday, it went as high as 16,900. However, the question of whether it will break the 17,000 mark remains open.

VIX remains close to previous lows

The VIX index, also known as the fear gauge, is derived from option prices. A week ago, it bounced down from the previous highs around the 14.0-14.5 level, which was a positive signal. Last week, the VIX continued downwards following as stock prices extended their gains. 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 remains close to 4,800

Let’s take a look at the hourly chart of the S&P 500 futures contract. On Friday, it approached its previous high of around 4,840 again. However, this level still stood as the important short-term resistance. Today, the market is trading along the 4,800 level again. The support level is also at 4,780.

Conclusion

Stocks will likely open slightly lower this morning, but the S&P 500 may further extend a consolidation below the 4,800 level. It’s uncertain whether the market will resume its medium-term uptrend or simply continue trading within a consolidation following November-December rally. Investors will be awaiting more quarterly corporate earnings releases.

On December 21, 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 medium-term uptrend, as no confirmed negative signals have emerged.

For now, my short-term outlook remains neutral.

I think that no positions are justified from the risk/reward point of view.

Here’s the breakdown:

• The S&P 500 remains close to the 4,800 level, and it may see more attempts at reaching its 2022 all-time high of 4,818.62.

• It still appears more like a consolidation than the start of a new uptrend.

• 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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