The Dow cracking the 20k barrier - now both on the index and the futures (US30 on the xStation platform) - is surely the major development of the week. In this article, we attempt to explain why US stocks are in such a bullish mood and look at the charts to see how far the index could rally in the near future.
Everyone is talking about the index crushing the 20,000 points barrier, but why did this happen? We see at least four significant reasons behind the rally:
- Tax cut expectations: Trump promised a CIT rate of 15%, down from the current 35% - such a cut would boost valuations by 15-20%, so even a smaller cut could be bullish
- Solid earnings: earnings of Wall Street companies are recovering following quarters of declines. Although this recovery does not match the pace of valuation increases, there have been far more positive than negative surprises recently. A strong report from Boeing pushed the Dow beyond the 20k line
- Higher market yields: higher yields hurt dividend stocks, but help banks. Banks (with Goldman Sachs as the number 1) are the key contributors to the Dow, which pushes the index higher
- Solid macroeconomic data: the macroeconomic picture has improved not only in the US but also in Europe while China has seen a much needed stabilisation. Slowdown fears have abated.
Turning to the technical analysis, we present an outlook on a daily and weekly interval. Let’s start with the daily:
The Dow (US30 on xStation platform) could be charging higher for as long as 19600 support remains intact. Source: xStation5
On a D1 chart we see not only a break above the 20k level, but also a decisive break above an upper limit of a channel. On one hand, this could suggest that stocks were overbought. However, at times, a decisive break from such a channel may accelerate the rally even further. Actually, the 20000 level is not that critical technically at the moment. Traders should pay attention to a lower limit of a recent consolidation at 19600. For as long as this support is intact, a bullish scenario could prevail. Notice that when a previous high was broken in November, the rally continued for more than a month and the index added around 1300 points.
As surprising as it might be, the whole post-crisis rally could be encompassed by a channel. Source: xStation5
On a W1 chart, the market does not look so overbought as you can see some space in a long-term upward channel. In this case, the upper limit is around the 21000 level. This is because stocks had their ups and down in 2015 and early 2016 and the index was testing a lower limit on numerous occasions. From this perspective, the entire "Trump rally" is just a small part of a giant bull market.
Obviously, there’s no guarantee the Dow (US30) will reach higher technical targets, including the 21000 points that many traders are already talking about as the next target. A technical outlook is bullish though - at least for now.
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