S&P 500 forecast: New highs for US stocks, DAX and Bitcoin

Investors’ insatiable risk appetite keeps S&P 500 forecast intact – for now

Risk appetite continued to remain insatiable in the first half of Thursday’s session, with Bitcoin surging through $100K hurdle and some to reach $104K, while the German DAX index hit yet another record high, reaching north of 20,300. In the US, the S&P and Nasdaq both hit new highs shortly after the opening (before easing off their best levels). Investors are looking ahead of the all-important non-farm payrolls report on Friday. Ahead of this, there were little signs of waning appetite for risk, keeping the S&P 500 forecast and trend bullish. But as the index starts to drift higher and higher into overbought levels, investors will be wondering when the Trump trade will be fully priced in. From here on, we may see some weakness creep into the markets amid profit-taking. But until the charts create clear reversal patterns, any short-term dip could be bought as they have been done all year.

When will the “Trump trade” be fully priced in?

Investors are continuing to pour funds into assets that have benefitted since Trump’s election victory. But soon, the market will wonder whether we have now priced in the potential impact of Trump’s win on the US economy and stock markets, and whether investors have even over-reacted. The markets are looking quite overvalued now with the major indices nearing technically overbought levels. Still. dip-buying remains the name of the game until the charts tell us otherwise. Therefore, even if the market were to weaken a little bit, this won’t necessarily be the end of the bull market until we have a proper bearish reversal signal to work with.

Technical S&P 500 forecast

The trend bullish trend that started in August continues to remain in place for the US stock market, as you can see with the series of higher highs and higher lows on the S&P 500 chart. Traders have bought every dip they got their hands on. While the index is now getting a little overstretched, until we see an end in the trend of higher highs and higher lows, there is little point in trying to figure out where the market may eventually top – though we can always be prepared with sound risk management such as always ensuring to have stops in place in case something happens.

Source: TradingView.com

Currently, the S&P 500 is residing inside what looks like a bullish channel. It is also holding comfortably above the long-term trend line, as well as the 21- and 200-day moving averages, and trading at record highs.

S&P starting to look a little overstretched

But after such a strong rally, there are a couple of warning signals that the index may be a little overstretched again, requiring some basing or consolidation, or a proper correction, before we potentially see more highs. The daily RSI, for example, is now near the overbought threshold of 70.00, although it has been quite common for the RSI to get even more overbought before the underlying index pulls back or consolidates. The monthly RSI, meanwhile, continues to hold above 70.00 since the summer – and this will eventually have to be addressed.

What’s more, the S&P has now breached the 161.8% Fibonacci extension level at 6028, derived from the last significant downswing that took place back in mid-July and ended in early August, putting it at extreme overbought levels. In strong bullish trends especially for markets trading at record highs, Fibonacci-based strategies are often used to determine targets. The Fibonacci-based targets from shorter-term downswing we saw post the election are also in focus, with the 127.2% being test at 6080 today.

Thus, we could potentially see some profit taking around these levels in the days ahead.

Key support levels to watch

So, in the event we do see a bit of a pullback, what are the key support levels to watch then, you may ask?

Well, on the S&P 500 chart, the first key level of support for me is now at 6027, which marks the post-election high made on November 11, before we took it out at the end of that month. Below this, 6000 comes into focus – a psychologically-important handle – followed by some slightly longer-term levels seen around 5882 and 5793.

-- Written by Fawad Razaqzada, Market Analyst