The S&P 500 rally has gathered pace as we head to the end of September, lifting the major indexes to near technically overbought levels ahead of Q3 earnings and US elections.
So, at least some level of profit-taking is due, but for now, there are no bearish signals to suggest the top is in.
If anything, investors are finding more excuses to remain invested or even buy more stocks at these levels as central banks and government are not only easing rates, but some are providing fresh stimulus.
Indeed, the latest rally in US index futures coincides with a sharp rally in Asian markets overnight, driven by a fresh wave of Chinese stimulus measures.
China adds even more stimulus
China is stepping up its efforts to revitalize its slowing economy, pledging substantial fiscal spending to hit growth targets. Reports suggest that the country may inject up to 1 trillion yuan into its top state banks to increase their lending power.
This comes after the Chinese central bank rolled out its biggest stimulus package since the pandemic earlier this week. On top of this, you have monetary easing from other global central banks all helping to keep stock market bulls happy.
The Federal Reserve cut rates last week, joining other central banks in what could be the start of a broader rate-cutting cycle. Markets are currently pricing in a 62% chance of a 50 basis-point cut at the Fed’s November meeting.
What to watch in US data calendar
Today, the US macro calendar is busier. Traders have shifted their focus to the US labor market for further clues on the direction of interest rates. Attention will be on US jobless claims data, as well as the Fed Chair Jerome Powell’s speech later.
Several other Fed officials will also be speaking including, Collins, Kugler, Bowman, William, Barr, Cook and Kashkari.
Technical analysis and trading ideas
The rally has been incredible. Every time it has looked like it has peaked, dip buyers have stepped in right where they needed to, pushing the index to fresh uncharted territories.
At some stage, it will top out and we will see a sharp sell-off. But until that happens, dip-buy continues to remain the preferred trading strategy.
With that in mind, let’s now discuss key levels where the index may find support if we get a pullback later today or in the week.
The most important short-term support is now the area around 5797, where the index had found mild resistance in the last few days.
Below that level, the mid-July’s old all-time high of 5721 is the next key support to watch, followed by 5669. As things stand, only a potential move below this zone would be considered a bearish scenario.
Meanwhile, if the rally continues, 5884/5 is the next upside objective as this level marks the 127.2% Fibonacci extension of the last major downswing we saw in mid-July.
Strong momentum raises the potential for profit-taking in Q4
The S&P 500 looks set to close higher for the fifth consecutive month unless we see a sharp 2.4% drop in the next 3 trading sessions to wipe out the gains made in the last few weeks or so.
The index recovered from early weakness this month to rise around 7%, as the Fed’s outsized rate cut, China’s stimulus measures, and dovish signals from various other central banks all helped to keep the rally going.
Since bottoming out in October 2023, the index has risen in 10 out of the last 11 months, gaining an incredible 40% off that low. From its October 2022 low, it is up a huge 65%. And from its post-Covid low in March 2020, it is now around 165% better off.
Unsurprisingly, momentum indicators on various time frames all point to overbought conditions, albeit the daily is still just below the 70.0 threshold.
However, the monthly RSI has crossed above 70.0 and has reached its highest since January 2022, when a multi-month bear trend followed. But the monthly RSI was even more overbought in August 2021, September 2018, and January 2018.
So, on its own, the RSI moving to overbought levels is not a sell signal but a warning that correction or consolidation could be on the way soon, possibly as we enter Q4 given the looming US elections and ahead of Q3 earnings results.
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Disclaimer: This article is written for informational purposes only; it does not constitute a solicitation, offer, advice, counsel or recommendation to invest as such it is not intended to incentivize the purchase of assets in any way. I would like to remind you that any type of asset, is evaluated from multiple perspectives and is highly risky and therefore, any investment decision and the associated risk remains with the investor.
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