S&P 500 technical analysis: time to book profits?

S&P 500 analysis shows the trend is up but index could be overextended in near term

The S&P 500 has been trending up and hitting new highs as the roll-out of coronavirus vaccines, the reopening of the economy and a favourable US Federal Reserve have boosted sentiment among US investors.

Recently UBS revised its target for the S&P 500 higher. The firm expects the S&P 500 to close the year at 4,400 instead of the previous estimate of 4,200. 

According to Yardeni Research, the consensus analyst estimate for the S&P 500 earnings in 2021 is $177.77. That means, at the current level of 4,173.42, the index is quoting at a price-to-earnings ratio of more than 23 times. 

Compared with historical averages, the S&P 500 p/e ratio is at a premium but that could be due to low interest rates and massive fiscal and monetary stimulus. However, the abundant liquidity could well return and bite the markets as inflation is likely to pick up in the US. If that happens, bond yields could rise and suppress the earnings of S&P 500 companies.

It has become difficult to analyse the S&P 500 fundamentals due to uncertainty over the coronavirus pandemic, which continually raises its ugly head. So let’s enlist some technical support and perform the weekly S&P 500 price analysis to determine the long-term trend.

S&P 500 technical analysis: weekly chart

The S&P 500 has risen from the March 2020 low of 2,184.7 to an all-time high of 4,191.9 in April, a 91.87% rally in just over a year. The up-sloping moving averages and the relative strength index (RSI) in the overbought zone suggest that bulls are in control.

However, the sharp upward move of the past few weeks has pushed the index further away from the 50-week SMA. This suggests the markets are getting overheated and may be due for a mean revision.

The S&P 500 analysis shows that the 20-week exponential moving average (EMA) has repeatedly acted as a strong support. As a result, during any declines the bulls are likely to buy near the 20-week EMA. 

A successive close below the 20-week EMA will be the first sign that momentum has weakened. That could pull the index down to the 50-week simple moving average (SMA).

The S&P 500 price analysis of the weekly chart shows the trend is up but a mean revision could be around the corner. Let’s perform the S&P 500 analysis of the daily chart to see if it has formed any bearish set-ups.

S&P 500 technical analysis: daily chart

The index is trading inside an ascending channel. The bulls tried to push the index above the resistance line of the channel on 15 and 16 April but the bears thwarted their attempt.

However, the positive thing is that buyers did not allow the index to slip below the 20-day EMA. This suggests that demand remains strong and traders are buying on every minor dip.

The bulls will now make one more attempt to thrust and sustain the index above the resistance line. If they succeed, the index could start its journey towards the next target objective of 4,458.

Conversely, if the index turns down from the resistance line, the possibility of a break below the index increases. That could pull the price down to the support line of the channel.

S&P 500: buy or sell at these levels?

The S&P 500 technical analysis shows a clear uptrend both on the daily and weekly chart. However, the index seems to be getting overextended on the upside, which warrants caution.

Traders may remain on the long side and look to buy the dips until the index remains above the 20-day EMA. 

On the other hand, a break below the 20-day EMA will signal a possible correction that could deepen to the 50-day SMA. Therefore, traders may stay on the sidelines if the 20-day EMA cracks. Shorting in an up-trend could be risky, so traders may wait for the trend to turn down before attempting to short the index.


Trade S&P 500 - S&P 500 price

USA 500
Daily change
Low: 4555
High: 4562.8

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