Dow Jones, S&P 500 Forecast: Surge to Record Highs Running out of Steam
- The equity market drifted lower on light volumes during APAC trade.
- US benchmark indices may slide lower despite a relatively positive fundamental backdrop.
- Bearish RSI divergence suggests that the SP 500 and Dow Jones could be at risk of a short-term pullback.
ASIA-PACIFIC RECAP
Equity markets drifted lower during the Asia-Pacific session on light volumes, as Chinese New Year celebrations curbed trade. Australia’s ASX 200 slipped 0.63% as Victoria, the nation’s second-most populous state, entered a snap 5-day lockdown due to an outbreak of coronavirus cases. Japan’s Nikkei 225 drifted 0.28% lower.
In FX markets, the haven-associated US Dollar and Japanese Yen gained ground, while the cyclically-sensitive Canadian Dollar and Norwegian Krone largely underperformed. Gold and silver prices slid marginally lower as yields on US 10-year Treasuries held steady at 1.16%. Looking ahead, UK GDP figures headline the economic docket alongside consumer sentiment out of the US.
FADING MOMENTUM HINTS AT SHORT-TERM PULLBACK FOR US EQUITY INDICES
US benchmark indices climbed to fresh record highs overnight, on the back of positive jobs data and the prospect of additional fiscal stimulus. However, price action suggests that a near-term pullback could be on the cards, as near all-time high price/earnings ratios suggest that valuations may be overstretched.
That being said, results for the latest earnings season have been relatively positive, with just over 74% of the 387 companies in the S&P 500 posting better-than-expected results. The impending delivery of a substantial fiscal support package may underpin stock prices, with House and Senate Democrats paving the way for President Biden to pass the majority of his proposed $1.9 trillion plan with a simple majority – in a process called reconciliation.
S&P 500 futures daily chart created using Tradingview
The formation of multiple Doji candles, alongside bearish RSI divergence, suggests that the S&P 500 may slip lower in the coming days.
A pullback to former support-turned-resistance at 3852, if sellers can successfully hurdle the 3900 marks and 8-day EMA (3883). Breaching that could open the door for the price to challenge confluent support at the uptrend extending from the March 2020 nadir and 55-EMA (3745).
However, bullish MA stacking, in tandem with the RSI hovering above 60, implies that an extended reversal lower is relatively unlikely.
Ultimately, a daily close above 3930 is needed to signal the resumption of the primary uptrend and pave the way for the index to probe the psychologically imposing 4000 marks.
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