The stock market is poised to open much lower, but does this signal a new downtrend?
Stocks pulled back slightly on Friday, with the S&P 500 closing 0.29% lower after reaching a new record high of 6,128.18. However, Friday’s trading session did not hint at today’s sharp downturn. The S&P 500 is expected to open 2.0% lower, driven by concerns over recent developments in Chinese AI technology that may undermine U.S. companies in the sector, as well as Friday’s actions by the Bank of Japan, which could trigger a potential unwinding of the yen carry trade.
Investor sentiment had significantly improved last week, as shown by the Wednesday’s AAII Investor Sentiment Survey, which reported that 43.4% of individual investors are bullish, while 29.4% of them are bearish.
The S&P 500 index appears likely to retrace a large part of its recent gains, as we can see on the daily chart.
S&P 500 Broke Above 6,100 Last Week
The S&P 500 gained 1.74% last week, following a 1.9% decline the prior week. Despite reaching a new record high on Friday, the market extended its consolidation phase.
Key medium-term support level remains around 5,700, marked by previous lows, while the resistance is around 6,100.
Nasdaq 100 Consolidated Below 22,000
The Nasdaq 100 closed 0.58% lower on Friday and is set to open 3.5% lower this morning, driven by sell-offs in AI-focused stocks like META, MSFT, and NVDA.
Key resistance remains at 22,000–22,100, while support is at 20,800-21,000.
VIX Remained Near 15
On December 18, the VIX index, a measure of market volatility, surged to 28.32, its highest level since early August. After dropping below 15 in late December, the VIX rose again, and two weeks ago, it reached a high of 22.04. Last week, it fell as low as 14.59.
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.
S&P 500 Futures Contract Selling Off
This morning, the S&P 500 futures contract is trading slightly above the 6,000 level, after dropping as low as 5,948. The current rebound appears to be a short-term correction, and the market may retest its overnight low. The support is at 5,950, and the resistance is around 6,050, among others.
Conclusion
The stock market is poised for a sell-off today, with major indices gapping lower after an overnight pullback in futures trading. The S&P 500 is expected to retrace a large part of its recent gains, dipping below the 6,000 level. There are currently no clear positive signals, and the market may extend its decline, with profit-taking likely to continue.
On January 6, in my Stock Price Forecast for January 2025, I wrote that “the stock market is poised for continued fluctuations following the post-election rally in November. Although the S&P 500 dipped by 2.5% last month, this appears to be just a correction of November’s gains.
Will the market resume its uptrend and reach new record highs? This appears likely at some point, driven by growing optimism ahead of Trump’s upcoming inauguration on January 20. However, rallies may provide selling opportunities, leading to a medium-term consolidation phase.”
For now, my short-term outlook is neutral.
Here’s the breakdown:
- The S&P 500 is expected to open much lower due to Chinese AI news.
- The stock market is still seeing increased volatility following the post-election rally.
- In my opinion, the short-term outlook is neutral.
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Paul Rejczak,
Stock Trading Strategist