S&P 500 Outlook

Technical Outlook

From the charts, it can be understood that the S&P 500 index was moving inside a channel and in the year 2009 it tested the low made during 2002-03 period. It gave a false breakout on the downside, but managed to come back to its support level around 770.

During this period, the Signal line crossed the MACD line on the upside (Positive crossover) giving a trend reversal signal. At the same time if we look at the RSI, the relative strength index reversed from the oversold level of 30 and was pointing upwards. This can be seen from the circled portion in the chart.

From then the S&P 500 index was on an upside. We can say that we are in an extended bull market.

From 2015 till the beginning of 2016, the index moved sideways and on several occasions it tested the bottom trend line and bounced back.

In January 2018, the index managed to break out of its rising flag pattern on the upside, but soon lost its momentum and returned to trade inside the flag pattern.

In July 2018, it once again broke out from the flag pattern on the upside and in September made a new life time high of 2,940.

In October, the index witnessed huge selling pressure and wiped out the entire gain made during the previous 3-4 months. This massive selling created a long red candle (P on charts), which engulfed its previous 2-3 candles. This pattern is called as Bearish engulfing pattern and is an indication of trend reversal.

Because of the selling pressure, Signal line crossed the MACD line on the downside (Negative crossover), similarly the RSI reversed from the overbought level and is pointing downwards.

However, the pattern that has come up in the charts does not confirm the trend reversal unless the index takes out it October month low, which is around 2,600. Even if it is breached another support is there at 2,540. This is where the lower trendline is placed. So if it takes support here, it will continue in the rising flag pattern.

Worst case scenario is that, if both these supports are taken out, then S&P 500 could move to 2,400 in the medium term and between 2,140-80 in the next 1 to 2-year period.

However, if S&P 500 index manages to close above the 2,800 levels on a continuous basis then we can say that the upside is still intact and the S&P 500 index could move towards 3000 to 3,200. But that could be the peak of the markets. We could see the markets drifting after that.