In my post “My Outlook On The Stock Market” I shared my stock market outlook and explained, that I am expecting more volatility in the markets in the short-term, mainly due to uncertainties arising from the presidential election in the U.S. and halted negotiations for further stimulus payments.
Indeed, we experienced another corrective move in the markets, starting from Tuesday the 13th of October. In this post, I would like to provide some insights to you, why I remain bullish about the further developments in the stock markets. Therefore, I will take a close look on the S&P 500 index, using technical chart analysis and technical indicators. But first let’s take a look on the current chart of the S&P 500 on the daily timeframe.
- All-time high: ~3,900 points @ 2nd September 2020 (high)
- 1. Correction: ~3,200 points @ 24th September 2020 (low)
- Retracement: ~3,550 points @ 12th October 2020 (lower high)
- 2. Correction: ~3,420 points @ 19th October 2020 (higher low)
The first corrective move stopped slightly above the 100-day moving average (orange line), which acted as a support level. A following retracement to the upside created a lower high, and a higher low was the result of the second correction so far. Due to that, the markets seems to be in a sideways movement and the further direction in the market is not yet clear. But we can use technical analysis and indicators to better understand the overall situation.
If we apply Fibonacci analysis on the first corrective move, to identify potential resistance levels during the retracement to the upside, you can see that we already crossed all relevant Fibonacci resistance levels (0.236 / 0.382 / 0.500 / 0.618 / 0.786) and are now back testing the retracement zone (range between 0 and 0.618 Fibonacci level). Especially crossing the 0.786 level indicates, that the market might prepare for another move to the upside right now. In addition to that, holding the 0.618 retracement level during the back test is a bullish indicator. Therefore, I will take a close look, if this level will hold in the next days or not. If yes, I expect a development towards the all-time high at 3,900 points in the short-term again.
Cup and handle pattern
Moreover, a nearly perfect cup and handle pattern can be identified in the charts, while the handle is not yet fully present. But, if the mentioned 0.618 Fibonacci level holds as a support level and the markets start to move further to the upside, it is likely that the pattern will be fully formed in the charts. A breakout through the top line, could then lead to an agile move to the upside. A cup and handle pattern is a typical pattern, that is formed during a period of profit taking and indicates, that the long-term uptrend is still intact. This also aligns with the overall market situation right now.
Volume, RSI & MACD
Other technical indicators currently show that we are in a neutral area. Trading volume is at a normal level and the RSI at approx. 50 (neutral zone). The MACD indicator currently implies a cross of the signal line (orange) with the MACD-line (blue), which could turn the MACD histogram into the negative zone and lead to a higher sell volume in the short term. But, this does not necessarily lead to a bigger correction in the market.
Although technical analysis is not always precise, the current set-up between Fibonacci analysis and a forming cup and handle pattern shows, that the long-term uptrend is still intact and that we might see further growth in the short-term. Therefore, I remain bullish and will take a close look if the 0.618 retracement level will hold as a support level.
Indicators like the RSI and MACD are in neutral zone and do not provide sufficient information about the next move in the market.
But besides technical analysis it is also important, to consider further news about the presidential election in the U.S., further negotiations in terms of the next stimulus package and of course the pandemic in the next days. Any bad news could influence the further market developments and lead to a whole new situation.
Just in case my analysis is wrong, and the markets will continue to drop further, I additionally identified important levels, that can be considered as support levels in this case.
- 3,393 points (previous all-time high)
- 3,331 points
- 100-day MA currently @ 3,300 points (orange line)
- 3,210 points
- 200-day MA currently @ 3,125 points (red line)
Especially the 200-day MA has acted as a strong and reliable support level for years now.
The background for this post is, that I would like to provide you a little bit of reassurance in the current uncertain market environment. What are your expectations in the coming days or weeks?
Update 9th November 2020: The cup and handle pattern unfortunately did not play out, but the S&P 500 did hold the support level at around 3,210 points that i mentioned.