As regular 80-20 Investor members know, periodically I like to look at what technical analysis suggests about where key markets might be headed next. It's been almost 8 months since I last wrote a technical analysis piece. Therefore it's an opportune time to take a look at how key markets have fared and where they may head next as we move into 2025, especially after the market slump following the US Federal Reserve's December meeting.
Remember, technical analysis is not a crystal ball but instead gives you a range of possible outcomes and levels to watch. In volatile market conditions, technical analysis tends to prove particularly useful and traders and professional investors start to pay greater attention to it.
As ever, I like to recap what technical analysis is and how it works. I always advise investors not to try and time the market because they will never get it right. However, there's nothing wrong with trying to determine a range of possible future outcomes within investment markets. Think of it like a weather forecast. It’s not 100% accurate but it will give you a better idea of whether a storm is on the horizon or when one might blow over. Technical analysis is the nearest thing we have to weather forecasting in the investment world.
What is technical analysis? - A recap
For those who don't already know or have forgotten here is an explanation of what technical analysis is:
Trying to predict the future of the stock market is akin to reading tea leaves. Personal predictions are almost always clouded by prejudices that reaffirm what we ‘want’ to happen rather than what is ‘most likely’ to happen.
That is why one objective method is to use technical analysis to try and judge likely outcomes. So what is technical analysis? One line of thinking is that stock markets are driven largely by human behaviour. At the simplest level you could argue that fear and greed drive a lot of investors’ actions. Let’s say that an opportunity presents itself and some investors jump on it and buy the shares in question. The demand then drives up the price. More investors jump on the bandwagon looking to profit. Then at some point the tide turns (fear sets in) as people think the price for the shares is looking expensive and so people start selling. More and more people start selling to take profits and the price falls. At some point the price falls until others think the shares look cheap and start buying, outnumbering the number of sellers. Again demand outstrips supply and the price goes back up.
This see-sawing explains the movement you see in stock market charts such as those below. The price at which investors start bailing and selling the shares is called a point of resistance while the point at which they pile in is called a point of support.
As such there is a surprising level of predictability to human behaviour. In terms of the stock market that means when the price goes through historic points of resistance or support it can indicate a new unfolding market rally or collapse. Why does it do this? Part of it will be because traders trading in millions of pounds will use these points of resistance and support to trigger trades. Yet for a lot of investors they might not even be aware of these inflexion points. They simply are reacting to how other people in the market behave. Put it this way, when stock markets fall you feel tempted to sell, right? Also once it starts to rally, you are tempted to jump in? That’s why these patterns have a tendency to repeat.
Some investors and traders swear by it and trade solely using technical analysis. I don’t fall into that camp. I view technical analysis like a road map drawn by someone who has already completed a journey to somewhere near where you are planning to drive to. The road map won’t take you exactly to your intended destination, nor will it be entirely accurate. However, it will give you a better sense of what to expect. Then if you decide you like the look of a particular market you can use 80-20 Investor’s ‘Best funds by Sector‘ data to help choose an actual fund to invest in.
Latest technical analysis
There are different types of technical analysis, however, I find the most useful guide is to simply highlight the points of resistance and support, as I've done previously. So below I provide technical analysis, looking at areas of support (the green lines in the charts below) and resistance (the red lines), on the key global equity markets and the pound/dollar exchange rate. Click on the charts to enlarge them.
US stock market
The chart below is from my previous technical analysis piece published back in May 2024. As you can see, the S&P 500 had just broken down from an uptrend and was looking for support.
Fast forward to today and you can see below that the S&P 500 did indeed find support before it started a new uptrend that lasted until late summer. The subsequent pullback didn't quite meet the official definition of a correction (which is a 10% fall from a recent high) before it found support at 5186. The S&P 500 has since traded in a new multi-month uptrend channel on the way to new all-time highs.
On Wednesday the S&P 500 fell almost 3% in a single trading session after the US Federal Reserve gave a hawkish outlook for monetary policy, despite cutting interest rates by 0.25%. With the Fed now predicting that it might only be able to cut interest rates twice in 2025, rather than the 4 times it previously anticipated, investors became concerned about the persistence of inflation. The sell-off was widespread but particularly hurt tech stocks and also US treasuries. At the time of writing you can see that the market found support at 5870, which is no coincidence and is now attempting to recapture the uptrend channel. As we move through the last few trading days of 2024 and into the new year keep an eye on this zone. If the S&P 500 can rally it will hit resistance at 6000 and also 6090 (the recent all-time high) and 6100. If it can break above there then the sky is the limit once again.
On the downside, the long-term chart below provides a visual guide as to where the potential support levels are if the market crashes. If we break below 5870 then watch 5800 and then 5700. If we do see a full-blown correction it would take the index down towards 5400 to 5500. But there is plenty of support at those levels.
UK stock market
Back in May I shared the chart below to show how the FTSE 100 had eventually broken out of a 9-month sideways consolidation zone. However, I explained that if the move was to be maintained then the FTSE 100 needed to stay above the 8012 level, which marked the previous all-time high set in 2023, otherwise it could complete a double-top formation, marking a failed breakout.
As you can see below, the FTSE 100 did in fact sustain the move above 8012 and a new all-time high swiftly followed. Not only that but you can see just how important the 8012 level has become in supporting the FTSE 100 index. It is another beautiful demonstration of how former lines of resistance turn into lines of support once the index breaks above them.
The longer-term chart below puts the 8012 support level into its historical context. This also demonstrates the usefulness of technical analysis and the seemingly ingrained market memory. Right now the FTSE 100 is in a new sideways consolidation range between 8012 and 8360. It means that if the FTSE 100 gains enough momentum to break above this zone we could see another new all-time high. Conversely, a break below 8012, could lead to further downside and ultimately see the index head back into the previous sideways trading range of 7257 and 7730.
Japanese stock market
The chart below is from my technical analysis piece in May 2024 which shows how the Nikkei 225 was still in an uptrend but becoming cornered by an uptrend line and a downtrend line.
I explained that typically these patterns tend to lead to explosive moves higher or lower. It turned out to be the case once again, as shown in the updated chart below.
The Nikkei 225 bounced off the rising uptrend line and eventually went on to make a new all-time high. The first in more than 30 years. Eventually the market lost momentum and violently sold off, after the Bank of Japan raised interest rates. Support was found at the long-term level of 31640, which was a key level in the previous consolidation zone of 30500 to 33753.
However, violent sell-offs, such as we saw in the Autumn, are usually followed by short-squeezes which push the market higher. We saw this play out again. Interestingly there is now a case for a longer-term uptrend which is still intact that dates back to early 2023. But short-term, the Nikkei 225 is stuck in the 38000 to 40000 band as it has been for large parts of 2024. On the downside, 38000 is important and then below there 37500 currently marks the uptrend line. A break below 37500 could see the index revisit 33753.
Looking higher, 40000 needs to be broken above as it is a strong line of resistance. If the index achieves that then the all-time high of 42224 is back in play.
Pound vs Dollar
In my last update the pound was trading near $1.250 and after quite a wild ride in the second half of 2024, that's pretty much where it finds itself again (see chart below). $1.25 and $1.255 are very strong support levels which are propping up the market right now. The pound had been previously enjoying a strong uptrend against the dollar which peaked at $1.343. But a lot of what we've seen since has to do with interest expectations in the UK versus the US as well as differing economic outlooks between the two countries. It's led to the pound tumbling against the US dollar.
If we zoom out you can see that despite the pullback, the pound remains in a long-term uptrend that began at the start of 2023. If the pound falls below $1.25 it could signal the end of the longer-term trend. If it does fall, then keep an eye on $1.235 as an important line of support.
Looking higher, a clear break above $1.2750 would likely set the stage for a test of the $1.2800–$1.2820 zone, an area that previously capped rallies. The $1.28 resistance line is very strong and difficult to breach. Above $1.28 attention would turn to $1.30 which is a pivotal resistance line. A break above or below $1.30 usually sets the tone for the pound in the short-term
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