Are Stocks Approaching a Correction? Fear Back, Topping Pattern Expected?

The stock market continued to fluctuate on Tuesday and Wednesday, with the S&P 500 index gaining 0.02% compared to last Friday’s closing price. Wednesday (29 May), we saw declined 0.74%.

Last Thursday, the market sold off after a higher open, despite NVDA stock rallying by over 9% following its earnings release. On last Friday, the market rebounded, and since then it has been basically moving sideways.

I would see this as part of consolidation process after series of good run, but are we seeing fear back in the market? If so, then, is it a topping pattern?

S&P 500 Staying Within A Consolidation

We saw the $S&P 500(.SPX)$ closing back below the 5,300 level, after losing 0.74%. Last week Friday’s rebound was retraced.

Last week, investor sentiment improved, as indicated by AAII Investor Sentiment Survey on Wednesday, which showed that 47.0% of individual investors are bullish, while 26.3% of them are bearish.

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 keeps going sideways after breaking below the upward trend line, as we can see on the daily chart.

Nasdaq 100 Remained Relatively Strong

Last week, the technology-focused $NASDAQ 100(NDX)$ reached a new record high of 18,907.54 on Thursday before closing lower. That looked like we are going to see intensive profit-taking coming, but on Friday, we saw that Nasdaq making gains again.

Nasdaq 100 closed up 0.32% on 28 May, but we saw Nasdaq dropping 0.58% lower, which extend the consolidation.

VIX Above 14 Indicate Fear Is Back

The $Cboe Volatility Index(VIX)$ also known as the fear gauge, is derived from option prices. In late March, it was trading around the 13 level. However, market volatility led to an increase in the VIX, and on April 19, it reached a local high of 21.4 (the highest since late October), signaling fear in the market.

Recently, it was going lower again, and on last Thursday, it was the lowest since November of 2019 at 11.52. Yesterday, the VIX closed above the 13 level at 14.27.

This indicate that fear might be creeping back in the market, historically, a dropping VIX indicates less fear in the market, and rising VIX accompanies stock market downturns.

However, the higher the VIX, the lower the probability of the market’s downward reversal.

Short-term Outlook Still Neutral

I personally feel that short-term outlook for the market remain neutral, this is the reason why I feel that way.

• The S&P 500 has further extended its short-term consolidation despite last week’s pullback and a temporary fear factor for the market. Yesterday, the fear seems to be back, but for now, it looks like a move within a consolidation. (VIX is at 14.27)

• On Friday, April 19, stock prices were the lowest since February, indicating a correction of the medium-term advance. Recently, the S&P 500 retraced all of its mid-April sell-off, reaching new record highs above 5,300. But S&P 500 went below 5,300.

Summary

Last week, we saw the trading session being led on Thursday to a deeper correction, but Friday session advanced on technology sector strength.

When market opened after the weekend holiday on Tuesday (28 May), the market did not do much, it remain within a consolidation. Yesterday (29 May), we saw broad selling with negative bias.

Are we expecting a topping pattern? For now, i see that we are looking at another potential profit-taking action following recent record-breaking advances. However, a decisive breakdown of the 5,250 support level, currently, it is at 5,266.

That would likely lead to a deeper correction of the advance from the early May local lows.

Appreciate if you could share your thoughts in the comment section whether you think S&P 500 could be entering into a profit-taking session resulting in yet another correction?

@TigerStars @Daily_Discussion @Tiger_Earnings @TigerWire appreciate if you could feature this article so that fellow tiger would benefit from my investing and trading thoughts.

Disclaimer: The analysis and result presented does not recommend or suggest any investing in the said stock. This is purely for Analysis.