The US stock market looks set to break all-time highs in the coming months as the S&P500 has found support above the critical level of 280.
United States President Donald Trump, who has often used the stock market as a barometer for his own success, may be proved right after claiming that December’s sharp move to the downside was just a “correction”.
After soaring to September’s all-time high of 294, the S&P500 nosedived 20% in a couple of months before finally finding support at 234 just before the new year.
The diagonal support trendline that propped the market up at 234 has been respected for more than a decade, with four bounces coming from that level since 2009.
The latest bounce was by far the most violent, with the S&P500 defying all odds by rising by 21% in less than two months.
Another significant factor in the most recent bounce was the confluence of the 200 exponential moving average on the weekly chart with the diagonal trendline. Aside from a stray wick, the weekly candle closed exactly on the 200 EMA before rallying to the upside.
The last time this moving average was tested was in February 2016, with another bounce of nearly 20% coming in the following months.
While many thought that December’s slump was the start of a long-awaited bear market, the subsequent bounce suggests that the bull isn’t ready to give up command just yet.
If the S&P500 can continue to establish support above 280, a test of 286 could be the next step before knocking on the door of all-time highs at 293.
Credit Suisse S&P500 forecast pic.twitter.com/GumZrWUNWj
— Kazi (@king_kazii) March 18, 2019
If the diagonal trendline continues to be respected moving forwards, it could mean the minimum expectation of the S&P500 by January 2024 would be around 320.
However, in spite of a bullish cross of the 55 and 100 EMAs on the daily chart, the stock market isn’t out of the woods yet. If price fakes out at this level and falls below 280, it could fall down to test levels of support at 259 and 254.
Which fundamentals are driving price action?
Aside from the technicals, there have been fundamental changes in the past few months that have driven the recent price action.
One major factor has been the increased profitability of corporate share buybacks, which hit a record $1.1 trillion in December.
93% Approval Rating in the Republican Party. Thank you!
— Donald J. Trump (@realDonaldTrump) March 18, 2019
The recent tax reforms in the US have also been received well by small businesses, with a renewed sense of optimism returning for Trump’s administration.
However, while small businesses are cheering, many are claiming that the reform is only temporary, with a movement mobilising to force Congress to make the tax breaks for small businesses permanent.
There have also been a number of cases of funds being repatriated from abroad back to the US. Apple planned to repatriate $285 billion in 2018, which has been seen as a big boost to investors.
If the stock market soars, where will that leave crypto?
Cryptocurrency has often been seen as a safe hedge to the stock market. While economic and political instability is usually a bad thing for businesses and the stock market, it regularly spurs price action in the cryptocurrency space.
Bitcoin was spawned out of the 2008 financial crisis. Consumers lost trust in banks and in turn sought a viable alternative.
Cryptocurrencies offered people the opportunity of self-sovereignty and eventually the masses flocked, culminating in 2017’s bull market that saw Bitcoin reach highs of $20,000.
But since then, the cryptocurrency market, as well as the hype that surrounded it, has dwindled, with the entire digital asset market cap falling from $813 billion to $139 billion in just over a year.
If the stock market, as predicted above, does rally on to new all-time highs, the cryptocurrency market could fall deeper into a bear market, with $1,150 and $1,800 being touted as key levels of support for Bitcoin.