What's Next For The Stock Market? - S&P 500
Updated
2019 looks like it's going to be a rough year for the stock market. There are many indicators suggesting that this is the beginning of a strong bear market. I wanted to take a longer time frame look at the stock market so I chose to go with the weekly chart for this analysis, let's get to it.
Total Market Cap vs. GDP
A way to look at the valuation of the stock market fundamentally, is to compare the country's GDP with the total market cap of the stock market. Currently the total market cap is 124% of GDP. Just a few months ago it was over 140%, which is a level last seen during the 2000 tech bubble. Stocks are expensive right now and have always found a way to return to a fair value. The Orange Line on the chart (around 1900) is roughly where the S&P 500 should be for the total market cap to equal GDP, just to give a visual idea of how overvalued stocks are.
It looks like the stock market is about to crash. Historically during a market crash, the total market cap of the stock market will dip below fair value before another bull cycle. That's why I look at the chart to determine technical support levels and find areas that may create bounces or even a bottom in a bear market.
Support Levels
Looking at the chart above, you can see several blue lines I have laid out that are likely going to be strong support areas if the price continues downwards.
The price recently broke the first support zone around 2500-2600 (lows for the year), accompanied by increasing volume over the past few months of downward movement. Since the beginning of the year the RSI has also displayed bearish divergence (which has also happened during the past two crashes). This is very bearish price action and will likely result in a further price decline to test the weekly 200 MA (Pink Line). The 200 MA has provided support in the past so it's something to keep and eye on. We may see a small bounce around that area as the RSI will also be in oversold territory, but I doubt it will last for long.
The next strong support zone on the chart is around 2100. This level seems likely to be reached if we see price keeps declining.
That was a very difficult resistance level to break through in 2015 through 2016, and when the price did break through, it dipped back down to test that level before moving further up. In my opinion, that will be an important level to watch for if we break below the 200 MA. The 1800 level is also an important area to keep an eye on should the price get to that level, it was rock solid support during the sideways movement in 2015 and 2016.
Finally we have the 1550 area, which was the S&P high just before the two previous stock market crashes. I see this as being a level that could provide a bottom should the stock market crash. There aren't any technical levels on the chart to hold up the price if It breaks below 1800. Total market cap would also be below GDP and stocks could be a great buy here, we should see a lot of buyers stepping in if we reach this level.
This is obviously a simple way to view the stock market, but that's how I like to trade. Usually I find most other indicators to just be noise and I don't like to over complicate my analysis. There are also many other things that can influence the stock market, such as fed rate hikes, political climate, trade wars, etc... So do your own due diligence and come to your own conclusion before making any investment decisions.
Where do you see the stock market heading?
*This is not financial advice. For entertainment and educational purposes only.
-Brad
Total Market Cap vs. GDP
A way to look at the valuation of the stock market fundamentally, is to compare the country's GDP with the total market cap of the stock market. Currently the total market cap is 124% of GDP. Just a few months ago it was over 140%, which is a level last seen during the 2000 tech bubble. Stocks are expensive right now and have always found a way to return to a fair value. The Orange Line on the chart (around 1900) is roughly where the S&P 500 should be for the total market cap to equal GDP, just to give a visual idea of how overvalued stocks are.
It looks like the stock market is about to crash. Historically during a market crash, the total market cap of the stock market will dip below fair value before another bull cycle. That's why I look at the chart to determine technical support levels and find areas that may create bounces or even a bottom in a bear market.
Support Levels
Looking at the chart above, you can see several blue lines I have laid out that are likely going to be strong support areas if the price continues downwards.
The price recently broke the first support zone around 2500-2600 (lows for the year), accompanied by increasing volume over the past few months of downward movement. Since the beginning of the year the RSI has also displayed bearish divergence (which has also happened during the past two crashes). This is very bearish price action and will likely result in a further price decline to test the weekly 200 MA (Pink Line). The 200 MA has provided support in the past so it's something to keep and eye on. We may see a small bounce around that area as the RSI will also be in oversold territory, but I doubt it will last for long.
The next strong support zone on the chart is around 2100. This level seems likely to be reached if we see price keeps declining.
That was a very difficult resistance level to break through in 2015 through 2016, and when the price did break through, it dipped back down to test that level before moving further up. In my opinion, that will be an important level to watch for if we break below the 200 MA. The 1800 level is also an important area to keep an eye on should the price get to that level, it was rock solid support during the sideways movement in 2015 and 2016.
Finally we have the 1550 area, which was the S&P high just before the two previous stock market crashes. I see this as being a level that could provide a bottom should the stock market crash. There aren't any technical levels on the chart to hold up the price if It breaks below 1800. Total market cap would also be below GDP and stocks could be a great buy here, we should see a lot of buyers stepping in if we reach this level.
This is obviously a simple way to view the stock market, but that's how I like to trade. Usually I find most other indicators to just be noise and I don't like to over complicate my analysis. There are also many other things that can influence the stock market, such as fed rate hikes, political climate, trade wars, etc... So do your own due diligence and come to your own conclusion before making any investment decisions.
Where do you see the stock market heading?
*This is not financial advice. For entertainment and educational purposes only.
-Brad
Note
Bounced right off of the 200 Week MA as expected. RSI nearing oversold territory as well, watching for a bounce to possibly test recent support around 2500 which is likely to turn into resistance.
Disclaimer
The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.