This article was written exclusively for Investing.com
Ahead of the fourth quarter earnings season, sentiment overall remains positive towards stocks and other risk assets, despite the growing COVID cases, and virus-related deaths and lockdowns. Investors are betting that with the roll out of vaccines we are heading towards normal times and are thus largely ignoring the short-term risks posed by the pandemic. More to the point, it is the ongoing support and huge stimulus programs by major central banks and governments that are helping to keep the markets supported at these extreme levels.
Indeed, US Federal Reserve Chairman Jerome Powell has re-assured investors that the central bank is not going to begin winding down its asset purchases later this year, and that it is far from considering an exit from its ultra-loose monetary policies. We have heard similar comments by a couple of other Fed officials this week, a sentiment also echoed by other global central banks. For now, the sell-off in US 10-Year bonds has been halted, and if bond yields start ticking lower from here this could give the green light for the stock market bulls to keep charging ahead.
With investors presumably awaiting fresh direction from the earnings front, and given some concerns about the recent spike in bond yields, the stock market has been in consolidation mode this week. But with the fourth quarter earnings season about to kick into a higher gear, we may well see increased volatility in the next few weeks. Still, with monetary policy set to remain ultra-loose for a while yet, any near-term stock market dips will likely be shallow and short-lived until such a time that the Fed starts tapering talks.
At the time of writing, the S&P 500 futures were testing potential support around 3773, and area which was previously resistance:
It is possible we may see a short-term deviation below this level, but I would still be looking for a rebound off the support trend of the rising channel.
However, if the index were to break out of the channel to the downside then that would be the first bearish sign, which could then result in a larger correction. Even so, the short-term bullish bias would only become completely invalidated upon the index breaking the longer-term bullish trend line and the last low prior to the latest rally made at 3596.
In other words, there is a bit of room for some manoeuvre to the downside before the technical outlook becomes bearish.
But the overall trend is clearly bullish, with the market making higher highs and higher lows. Until the charts tell us otherwise, I will continue to favour looking for dips to be supported than rallies to be sold into.