S&P 500 forecast: US stocks set to extend rally for sixth day

It has been another day of solid gains for the US markets, with the benchmark US indices holding onto gains of around 1.0 to 2.7 percent at the time of writing. Nikkei futures have surged further to 3.5%, tracking the USD/JPY higher in what has been a full-on risk-on day in the markets. It looks like the markets will end the week on a strong positive not, heading into the last day of the week. The technical S&P 500 forecast also looks quite bullish after the impressive recovery. This is causing the bears who until a couple of days ago must have felt they still had some control over price action, to lose their grip on the markets almost completely.

Why are markets up?

US index futures were already higher, but then rallied further, as news of a stronger-than-expected retail sales print (+1.0% m/m) was cheered by investors, who had been a little hesitate to buy equities earlier amid concerns over an economic slowdown following the release of weaker Chinese data overnight. At the time of writing, the S&P 500 was testing its session highs, looking to extend its winning run to a sixth day, assuming we won’t see a late-day sell-off. The strong gains since Tuesday have been fuelled by a combination of weaker inflation data, which further cemented expectations that the Federal Reserve would start a rate cutting cycle in September, and not-so-weak data ranging from retail sales to ISM services PMI and jobless claims, all helping to reduce concerns over a hard landing. This combination presents a goldilocks scenario for equities.

As the disinflationary process progresses further, investors will be wondering how the economy is going respond to the upcoming rate cuts and whether a hard landing could be avoided, which is still a risk judging by consistent weakness in industrial data. Recent macro pointers suggest the global economy is weakening, which should, in theory, be negative for company profits. But on the back of today’s mostly positive US data, some of those concerns have been scaled back. The recent impressive recovery in the last week and a half means equity market bears must await a fresh sell bearish before potentially entertaining the idea of shorting the markets. The bulls will be happy to continue buying short-term dips unless key support levels start to break down again. So far, we haven’t seen any evidence of that.

S&P 500 forecast: technical analysis and trade ideas

While the S&P chart is looking a little overstretched and overbought on the short-term time frames, that’s not to say a new sell-off will necessarily be on the cards. The impressive recovery means a close around current levels or higher would re-establish the trend line that broke down a couple of weeks ago amid the unwinding of carry trades.

Source: TradingView.com

Around current levels, some side-ways chop, and churn would not be the worst outcome here for the bulls as that will allow overbought conditions to be worked off through time. The fact that the S&P 500 has reclaimed the broken shaded blue area around 5440 to 5463 is going to keep the bulls happy for now. For as long as we don’t go back below this area, any short-term dips could present favourable trading opportunities for the bulls.

In terms of potential resistance levels to watch, well we are now approaching a key hurdle starting at around 5523 to 5565. This area was formerly support and kind of represents the last line of defence for the bears. The bears will clearly want to see some bearish price action here, else a break above it could send a strong bull signal that could potentially see the index head towards a new record high.

So, the technical S&P 500 forecast looks quite bullish as things stand, if only a little bit overbought.

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R