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S&P 500 forecast this week: should the bulls continue or is it time to book profits?

By Rakesh Upadhyay

The index is on a strong footing with further gains likely

The S&P 500 has advanced about 28.33 per cent this year, which is its best performance since 2013 when it had rallied 29.6 per cent. If the bulls can extend the rally by another 1.27 per cent in the final few days of the year, the S&P 500 might end up having its best year since 1997 when it had risen 31 per cent. This looks possible because the stock markets usually have a strong performance in the final five days of the calendar year and the first two trading days of the new year. The rally during this period is popularly termed as Santa Claus rally.

During the week, the S&P 500 rallied 1.65 per cent as the markets shrugged off the news of President Donald Trump’s impeachment. The markets believe that the Republican-controlled Senate will acquit Trump, hence, the market has not reacted negatively to the news. The stock market’s performance during the previous two impeachments was quite different. The index rallied when President Bill Clinton was impeached but declined during the impeachment of President Richard Nixon.

Should the bulls continue their purchases or is it time to book some profits? Let’s see what the analysis of the S&P 500 forecasts for the next week and the long-term.

S&P 500 weekly chart

The long-term trend in the S&P 500 is clearly up. It has consistently been making new highs during the past few weeks. This shows that the market participants have been buying at every higher level because they expect the rally to extend further. The only worrying sign on the chart is that the RSI has entered overbought territory.

In a bull market, the overbought reading on the RSI in itself does not signal the start of a correction. The markets can remain overbought for an extended period. However, when the RSI enters deeply oversold readings on the weekly chart, it usually ends up in a correction, as seen in January 2019.

The current rally might face resistance close to 3,250 levels. However, once this level is scaled, the index can rally to 3,450 in the medium term. Our bullish view will be invalidated if the index breaks down of the channel and sustains below it.

While the long-term picture looks strong, let’s see what does the S&P 500 analysis forecast for the next week.

S&P 500 prediction this week

The week started on a positive note as the market participants cheered the first phase of the trade deal between the US and China. There was a minor consolidation on Tuesday and Wednesday, post which the rally resumed. The index has been trading inside an ascending channel since early October.

S&P 500 technical analysis: daily chart

The S&P 500 is likely to move to the resistance line of the channel in the next week where it might face stiff opposition. The overbought reading on the RSI also indicates that the market has run up ahead of itself in the short term and a consolidation or a correction is likely. However, as long as the index stays inside the channel, every dip should be treated as a buying opportunity.

Our bullish view will be invalidated if the bears sink the index below the channel. Such a move will indicate that the momentum is weakening. However, we do not anticipate such a move during the next few days. The traders can continue to look for short-term buying opportunities on breakouts and on minor intraday dips.

FURTHER READING: S&P 500 forecast for January 2020

FURTHER READING: S&P 500 forecast for 2020

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