S&P 500 Technical Setup: Post-30% Rally Signals Modest Gains Ahead

The S&P 500's near-30% surge in 2019 has left technical analysts scrutinizing momentum oscillators and moving average convergences for clues on the year ahead. According to Goldman Sachs' private bank, which manages approximately $1.5 trillion in assets, U.S. equities are expected to gain only about 6% in 2020—a stark deceleration from the prior year's blistering pace. "Strong erstwhile returns have borrowed from future gains," noted Sharmin Mossavar-Rahmani, CIO of Goldman Sachs Investment Strategy Group. Historically, when the S&P 500 has returned 30% on a rolling 12-month basis, the subsequent year's average return is 10.4%, Goldman highlighted. Yet current technical indicators suggest even that may be optimistic.

Technical Indicators Flash Caution

The Relative Strength Index (RSI) on the weekly chart has retreated from overbought territory above 70, now hovering near 60, indicating waning upward momentum. The 50-day moving average continues to slope upward but has flattened, while the 200-day moving average remains in a steep ascent. This configuration often precedes a period of consolidation or a pullback to test support. The S&P 500's recent close at 3,274.70 on January 10, 2020, represents a 0.7% gain amid cooling U.S.-Iran tensions, but the index is now testing a key resistance zone around 3,280–3,300, where prior peaks in 2019 stalled.

Volume analysis reveals declining participation in the latest rally. The On-Balance Volume (OBV) indicator has failed to confirm new highs, suggesting that institutional accumulation is waning. Meanwhile, the AAII Sentiment Survey shows bullish sentiment among individual investors fell 4.1 percentage points to 33.1%, below the historical average of 38.0%, while pessimism hit a six-week high. This divergence between price action and sentiment often precedes a reversal.

Original Commentary: The Risk of Mean Reversion

From a technical perspective, the S&P 500's 2019 rally was exceptional not only in magnitude but also in its low volatility. The VIX, or fear index, repeatedly dipped below 12, reflecting complacency. Now, with the VIX creeping back above 13, options markets are pricing in higher tail risks. The monthly chart shows the index trading well above its 10-month simple moving average, a condition that historically has been followed by a reversion to the mean within 12 months. The 6% gain forecast by Goldman Sachs may thus represent a best-case scenario if earnings growth fails to materialize. A correction of 5–10% would realign the index with its long-term trend, offering a healthier entry point for long-term investors.

Key support levels lie at 3,200 (the 50-day moving average) and 3,100 (the 200-day moving average). A break below 3,200 could trigger a wave of stop-loss selling, accelerating declines. Conversely, a sustained move above 3,300 with strong volume would invalidate the bearish technical setup and open the door to new highs. However, given the historical precedent of modest returns following 30% years, the path of least resistance appears sideways to lower.

Sources: CNBC – Goldman Sachs 2020 Forecast and CNBC – S&P 500 Technical Outlook.

1. Goldman Sachs forecasts a 6% S&P 500 gain in 2020, down from 2019's 30% rally.
2. Technical indicators (RSI, volume, moving averages) suggest waning momentum and potential consolidation.
3. AAII sentiment shows rising pessimism, diverging from price highs—a bearish signal.
4. Key resistance at 3,280–3,300; support at 3,200 and 3,100.
5. Historical data indicates average 10.4% return after 30% years, but current technicals point to lower odds.