S&P 500 Forecast: Cooling off from overbought levels

• S&P 500 forecast: Index holding post-election gains for now but overbought signals point to pullback
• Upcoming Fed Chair Powell’s comments may cause volatility
• Technical analysis suggests bullish trend intact with potential support areas for traders highlighted

After last week’s US election, where Trump’s win gave a boost to US markets, the S&P 500 has largely maintained its impressive rally, staying resilient despite significant global market volatility. But outside of the US and cryptos, investors have been far more cautious, owing to the potential impact of Trump’s trade plans and signs US monetary policy may not loosen significantly further in 2025. Today’s Producer Price Index (PPI) measure of inflation was a little hotter, adding to the Consumer Price Index (CPI) from the day before. Yet, the dollar, already sharply higher, was hit by some profit-taking after the release. US indices hardly reacted, but that could change as we head deeper into the US session. European markets rallied strongly earlier, led by the German DAX, while APAC stocks continued a bearish trend after Wall Street’s mixed signals and a dip in European indices from the day before. So far, US stock investors appear unfazed by global softness in commodities and bond markets, even as the 10-year Treasury yield inches closer to 4.5%, reflecting a more hawkish interest rate outlook for next year. But with the dust settling on Trump’s election victory, could we finally see retracement to cause a bearish shift in the short-term S&P 500 forecast?

After slightly hotter inflation data, Powell’s Speech eyed

We have seen this week’s inflation data come in slightly on the hotter side of things, fuelling the bond market sell-off. After a slightly stronger CPI report the day before, today’s PPI numbers showed a similar result. PPI is key indicator for traders since they’re closely tied to core Personal Consumption Expenditures (PCE), the Federal Reserve's preferred measure of inflation. As per analysts’ expectations, we saw a modest increase in headline PPI, printing +0.2% on a month-over-month basis, but the prior month was revised higher to 0.1% from 0.0%. Meanwhile core PPI rose by 0.3% after a 0.2% increase the month before.

Adding to today’s events, Fed Chair Jerome Powell is scheduled to speak in Dallas, focusing on the economic outlook. His comments may shed light on the Fed’s stance regarding recent inflation trends and the Trump administration’s protectionist policies. If Powell refrains from directly linking these factors to Fed policy, it might dampen market worries, reduce rate hike expectations, and provide some stability to the S&P 500 forecast.

Technical S&P 500 forecast

The S&P 500’s strong rally reflects optimism that Trump’s promises—like tax cuts and increased infrastructure spending—will support corporate growth. This bullish momentum remains intact, with investors reluctant to sell yet. Until we see a shift in the trend of higher highs and higher lows, it’s challenging to argue against the prevailing upward movement.

Yet, caution is warranted. The S&P 500 is clearly overbought by most metrics, including the Relative Strength Index (RSI). Even without the RSI, price action alone indicates lofty levels; the RSI itself hovers around 70 on daily, weekly, and monthly charts, signalling that a correction or consolidation may be due. For seasoned traders, a short-term pullback could offer buying opportunities, though a clear trend reversal signal has yet to emerge.

Source: TradingView.com

For now, watch for a potential dip below the 5970 level on the S&P 500 chart as an indicator of short-term downside. A decisive break here could suggest a move toward the next support zone between 5857 and 5882, a range that served as resistance through much of October. Additionally, the 21-day exponential moving average falls within this range, reinforcing its significance as support.

If the market breaches this zone, the next area to monitor would be around 5772-5793, where the election day low was made, marking an important psychological zone. The index must hold here to avoid a broader correction, which could shift sentiment towards a bearish technical S&P 500 forecast.

Conclusion

Although a full-fledged sell-off is appears unlikely without the index first breaking multiple support levels, current conditions suggest a modest pullback may be in order for the S&P 500. As overbought levels ease, fresh buying opportunities could emerge, keeping traders on alert for the next potential setup.

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R