This article was written exclusively for Investing.com
Stock index futures dropped and the dollar rebounded in the early hours of Friday, as US-China tensions escalated ahead of the US monthly jobs report and the weekend. However, with the market being able to shrug off these concerns consistently over the past few months, I wouldn’t be surprised at all if the S&P 500 were to recover and hit a new all-time high, possibly as early as later today.
Ongoing central bank stimulus remains the key driver behind stock prices, and everything else is secondary, including geopolitical risks, the economy, earnings and valuations concerns. However, “everything else” does provide a good excuse for the longs to take profit and I reckon the latest pullback is another such scenario, even if I have strong macro concerns about this stock market rally. But unfortunately, or fortunately, the reality is that central banks have caused a big disconnect between the economy and the markets, and as traders we have to accept that if we want to remain solvent.
In any case, index futures have fallen for the time being after President Donald Trump signed executive orders to prohibit U.S. residents from doing any business with WeChat and TikTok beginning 45 days from now, because of national security risks.
But don’t be surprised if the markets later rally because of any number of the usual reasons: “optimism on a coronavirus vaccine,” “lawmakers pledging to work toward a coronavirus relief package,” better-than-expected jobs data (because this would raise optimism over an economic recovery) or even a slightly worse-than-expected report (as this would encourage the Fed to keep current policy measures in place for longer).
One other key reason for equity market bulls to step in again to buy this latest dip is the fact the S&P 500 is so close to reaching its prior record high as the index’s futures chart shows:
Indeed, from a technical point of view, the index does look very constructive.
It has obviously risen very sharply from its March lows, with only minor pullbacks from former support-turned-resistance levels before breaking them. The current price action clearly suggest that the bulls have been in control and that the group of trapped traders have been the bears.
In fact, the sellers had a very good chance to regain control when the index tested the point of origin of the COVID-linked breakdown around 3212/15 area back in early June. Although the index did find good resistance from here initially in early June and again in the first half of July, it eventually broke above this level towards the end of the month, before rising further higher in early August. Thus, the sellers’ last line of defence gave way.
Some would argue that bears’ last line of defence is actually the previous all-time high at 3397ish, but to me it looks like the battle has already been lost.
With the index building a base above that 3212/15 pivotal area, and breaking cleanly above it, there is no reason for it to go below this zone again from a bullish perspective. For if it did, this would represent a massive failure from their part, potentially resulting in a sizeable correction. But for extra confirmation, the line in the sand for me is at 3190, which was the last low made at the end of July prior to the index breaking higher.
Thus, until and unless the index breaks below 3190, or forms a major reversal at a higher level first, there is no technical reason for me to be bearish this market even if fundamentally the rally seems irrational. The bottom line is, people are buying stocks and the market is going up in a strong bullish trend. So why fight it?
Consequently, I am expecting the S&P futures to post a new record high above 3397 soon, possibly as early as later today.
If we get there then the next question is: can we hold above the old high or get a sharp rejection? The latter would be a bearish outcome, but we must see it first before looking for a potential downside move.