26 Jan

SP500m close to forming “golden cross”. What’s next?

January 26, 2023

By ForexTime

A golden cross is when the asset’s 50-day simple moving average (SMA) crosses above its 200-day SMA.

Such an event indicates that this asset’s prices have been climbing of late, enough to be higher than its longer-term average.

At the time of writing, the gap between those two widely-followed technical indicators now stand at less than 4 points on the SP500m.

When it happens, the “golden cross” tends to send a “bullish” signal to traders, suggesting there could be more gains in store.

NOTE: The S&P 500 index is a benchmark which measures the overall performance of US stock markets.

 

How has SP500m performed after forming a “golden cross”?

Here’s how the SP500m has fared following its past three “golden crosses”:

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  • July 2020: S&P 500 climbed by a further 50%, culminating in its current record high registered over a year ago, in early January 2022.
  • End-March 2019: S&P 500 climbed by another 20% as it came tantalisingly close to the 3400 mark, before the steep dropoff in February 2020 as the Covid-19 pandemic gripped global markets.
  • April 2016: S&P 500 advanced by another 40% until its then-peak in September 2018

 

Upcoming events that could rock the SP500m:

1) Federal Reserve decision: Feb 1

The world’s most important central bank is back in action again next week.

On February 1st, the Fed is due to announce how much higher it will send US interest rates.

At the time of writing, market forecasts are based on the following:

  • Fed will hike by 25 basis points (bps) on Feb 2nd.
  • Fed will hike again by a further 25 bps sometime after next week’s meeting, but no later than June 2023.
  • That would bring US interest rates from the current 4.5% up to around 5%.
  • The Fed will then keep its benchmark rate at around that 5% mark for a while, before cutting interest rates later this year.

Note that, generally, many asset classes such as stocks, gold, and even cryptos do not enjoy US interest rates moving higher.

Hence, if the Fed signals its intentions to move US interest rates even higher past the market-forecasted 5%, that could drag the SP500m lower.

However, if the Fed signals that it’s indeed ready to pause its rate hikes, that could translate into more gains for the SP500m.

 

 

2) Big Tech Earnings: Feb 2nd

Apple, Alphabet (Google’s parent company), and Amazon are all due to report their respective earnings from Q4 2022.

What are “earnings” and why does it matter?

  • These quarterly earnings announcements are when public-listed companies reveal just how good a job they did at earning profits over the prior quarter.
  • Markets tend to “reward” the companies whose earnings either came in better than expected, or are confident about their ability to keep earning higher profits in the near future.

    The reward = traders and investors buy up these stocks and send their prices higher.

  • However, if the company’s financial performance disappointed markets, or if the company’s management are concerned about tougher times ahead for the business, that could prompt markets to sell the stock and send its share price lower.

 

Why are earnings out of Apple, Alphabet, Amazon so important for the S&P 500?

Note that these stocks are some of the biggest in the world.

Combined, all three stocks have a market cap of almost 4.5 Trillion (with a “T”) US dollars. That accounts for almost 13% of the S&P 500’s total market cap of about US$35 trillion (as of market close on January 25th).

Hence, given their enormous size, how markets react to the earnings out of these 3 tech titans should have a major impact on how the S&P 500 performs as a whole.

Note that all 3 will report their respective earnings after US markets close a week from today – Thursday, February 2nd.

Hence, expect to see a major reaction in the S&P 500 when the US stock market reopens on February 3rd – the day following the earnings release by Apple, Alphabet, and Amazon.

 

What’s next after golden cross?

If such a bullish technical event does happen for the SP500m, equity bulls (those hoping stocks will move higher) will be looking to next conquer the following resistance levels:

  • 4060: downward upper trendline that began since January 2022 record high.
  • 4105.6: early December cycle high
  • 4144.2: December 13th intraday peak

A closing price above the 4144.2 intraday peak would signal a bullish breakout of the year-long downtrend.

Such price action may well entice even more stock bulls back to the fore.

 

However, if market sentiment turns sour that could drag the S&P 500 back below the psychologically-important 4,000 mark.

From a fundamental perspective, this could be due to any of the following:

  • disappointing US earnings
  • a still-hawkish Fed
  • growing fears of a US recession
  • other risk-off events

If so, then the following support levels will start to likely tempting to equity bears (those who believe that stock prices will fall):

  • 3947: 200-day SMA
  • Low-3900s: cycle high from late-Oct/early-Nov
  • 3885.5: previous cycle low

Forex-Time-LogoArticle by ForexTime

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