Todays's rally is a continuation of the improvement in risk appetite, partly driven on hopes over a vaccine but mainly because of expectations that the massive central bank and government stimulus packages announced in response to Covid-19 pandemic will fuel a speedy recovery
So, the bulls have finally done it. The S&P 500 is through that psychologically-important 3,000 level and the technically-important 200-day moving average, both on the same day. Against all odds, the index has arrived at these lofty levels in what is one of the largest asset bubbles created while the US and world economies are still in a recession, with skyrocketing unemployment and not to mention plummeting earnings growth. Granted, some of the optimism is justified because economies are re-opening slowly and given the vast central bank stimulus, and hopes over a vaccine for Covid-19. A couple of months ago, not many – even the most optimistic of bulls – would have foreseen this. But here we are, central banks once again came to the rescue and up we go despite a growing list of worries, that includes the potential for a complete breakdown in the US-China trade talks.
Source: ThinkMarkets and TradingView
It is important the breakout holds now. It is possible that the breakout could fail, which would be a bearish outcome if seen. In some ways, not to sound like a sore bear, this is something I have been anticipating, especially around the 200-day average. However, the market shave proven me wrong so far and as things stand, the bulls appear in full control. Therefore, the bears will need to see a confirmed breakdown, as short-term dips have all been bought in recent weeks. Indeed, a daily close around current levels ‘should’ pave the way for further gains in the days ahead.
Key support now comes in around old resistance circa 2970-2980, with Friday’s hammer head at 2957 being the next potential line of defence for the bulls. Thereafter, we have the support trend line of the bull channel. So, there are lots of levels that could provide support, meaning it is becoming increasingly difficult for the bears to win back control.
On the upside, the 3025 is a pivotal level because it was a massive resistance in the second half of 2019. Next up will be the 78.6% Fib extension against the all-time high, where we also have the top of the bull channel converging.
So, in a nutshell then, the path of least resistance is to the upside from a technical point of view. But there is always the risk for a reversal given the growing list of macro concerns which have been largely ignored until now.