The strong rally was observed from the symmetrical triangle formation in 2020 due to unprecedented monetary and fiscal policy responses to the COVID-19 pandemic, which stabilized financial markets and fueled economic recovery. The Fed implemented aggressive measures, including slashing interest rates to near zero, which increased liquidity and reduced borrowing costs. Concurrently, the U.S. government enacted substantial fiscal stimulus packages, including direct payments to individuals, enhanced unemployment benefits, and business support, bolstering consumer spending and corporate earnings.
Additionally, the rapid development and distribution of COVID-19 vaccines boosted investor confidence by promising a return to regular economic activity. These combined factors created a favourable environment for equities, driving the S&P 500 to record highs during this period. After the peak of this rally, the consolidation of 2022 and 2023 resulted in an inverted head and shoulder. The breakout of this pattern initiated another strong price surge towards the price target, which lay above 60,000 levels.
Overall, the technical picture of the S&P 500 remains bullish, and based on the historical technical bullish formations, it has set the stage for solid rallies in the coming years. These rallies are expected to occur after substantial price corrections towards support levels, which investors see as buying signals.
Short-Term Outlook & Key Action for Investors
As per the above discussion, the long-term outlook for the S&P 500 is strongly bullish, with prices poised to rise significantly. However, short-term indicators point to the risk of a price correction. This aligns with the possibility of liquidity contraction, as discussed in the first section of this article. The weekly chart below shows a rounding bottom formation, with a low at 3491.58 and a breakout of the neckline at 4600, which has initiated a surge in the index to record levels.
Major technology stocks such as Nvidia (NVDA), Microsoft (MSFT), and Apple (AAPL) have reached record highs duing this rally of S&P 500. However, the S&P index indicates a need for correction before the next upward surge. This is also supported by the fact that major stocks are approaching their respective targets. Moreover, the RSI reading on the weekly chart below shows that technical indicators are poised for overbought conditions and suggest a need for a price correction.