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S&P 500 forecast this week January 20 to 24: The index is close to a short-term top. It’s time to be cautious.

By Rakesh Upadhyay

What the weekly and daily charts say about the S&P 500 prediction for this week.

SP 500 forecast this week January 20 to 24: The index is close to a short term top. It is time to be cautious.

The US stock markets have started the new year on a strong note. The market has rallied about 12 per cent from early October. While momentum does play a role in determining the price in the short-term, in the long-term, the markets usually follow the fundamentals. In 2019, the markets soared even with poor earnings. The only major factor in favour of the stock market is the US Fed, which has continued to inject funds into the system.

Another thing to note is that the top five companies Apple, Microsoft, Alphabet, Amazon and Facebook together are worth $5.2 trillion (€4.69 trillion, £4.4 trillion) which is close to 18 per cent of the S&P 500. This is the highest percentage in history, according to Morgan Stanley. However, as their valuations get higher, a pullback might be around the corner.

With the sharp rally of the past few months, the sentiment in the market tends towards buying now or fearing that you will be left behind. The CNN Fear and Greed index is showing the sentiment of extreme greed. Usually, during such periods, the stock markets are most vulnerable to corrections because market participants throw caution out of the window. Let’s do the S&P 500 prediction for this week using the weekly and daily charts.

S&P 500 technical analysis: weekly chart

SP 500 forecast this week January 20: The index is close to a short-term top. It is time to be cautious.

The S&P 500 has been on a strong upward trend since bottoming out in early October 2019. From a low of 2855.9, the markets have rallied to 3329.6, a gain of 16.5 per cent within four months.

The pace of the rally has carried the RSI into overbought territory not seen since early 2018. An important thing to note is that, after the rally in January 2018, the markets had a quick 11.84 per cent correction.

We believe that the market will go through a similar phase of correction after the current rally tops out. However, it is difficult to call the top, especially when the market is backed by momentum and traders fear missing out on the rally. Still, we anticipate that the markets will hit a short-term top between the current levels and 3400.

The ensuing correction is likely to drag the price to the support line of the ascending channel, which is close to 3120. If this support breaks, the decline might pick up momentum. Therefore, traders should avoid getting sucked into the markets at the current levels. While we suggest caution, do we spot any topping patterns on the daily chart? Let’s find out.

S&P 500 analysis: daily chart

SP 500 forecast this week January 20. The index is close to a short-term top. It is time to be cautious.

The index remains strong even on the daily chart. It has reached the resistance line of the ascending channel, which is likely to be defended by the bears. The index could enter a blow-off phase if the price breaks out of the channel.

On the downside, the first support is at the 20-day EMA and below it 50-day SMA. The moving averages have acted as a strong support since October 11 of last year. Hence, we expect the bulls to defend the moving averages aggressively once again. A breakdown of the 50-day SMA will be the first indication that the markets are ready for a deeper fall.

S&P 500 prediction this week: January 20 to 24

Momentum traders can continue to buy the stronger stocks on breakouts. However, the idea should be to take quick profits and not hold on to the positions for a home run.

Most, investors should avoid buying anything at the moment. They should look to trail their stops higher and start booking partial profits on the stocks if the market enters a blowout phase. We are not suggesting selling the entire position because, during blowout phases, the markets can offer quick returns in a short time.

FURTHER READING: S&P 500 forecast for January 2020

FURTHER READING: S&P 500 forecast for 2020

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