American stocks ended the week well, with the S&P 500 Index jumping to a record high of $6,665, up by over 38% from its lowest level this year. Similarly, the Dow Jones Index rose to $46,315, up by 26% from the YTD low.
Dow Jones Index Analysis Points to a Crash
The daily timeframe chart shows that the Dow Jones Index has been in a strong rally in the past few months. This rally has been driven by the robust AI spending, Donald Trump trade deals, and the Federal Reserve interest rate cut hopes.
The risk, however, is that if you draw a trendline by connecting the highest points since March 26 and the lowest levels since May 23rd shows that the index has formed a perfect rising wedge pattern. The two lines are nearing their confluence, which may spark a retreat, at least to $45,112, a level it formed a double-top pattern.
At the same time, the Relative Strength Index (RSI) has formed a bearish divergence pattern as it has continued falling. This pattern also often leads to a bearish breakdown.
S&P 500 Index Forecast
The daily chart also shows a similarity between the S&P 500 and the Dow Jones. It has also formed a rising wedge pattern whose two lines have converged.
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The Relative Strength Index (RSI) has also moved to the overbought level at 72, its highest point since July 30. In this case, a plunge will see it drop to the support level at $6,143, its highest swing in January and February this year, which is about 8% below the current level.
Risks Facing the Crypto Market
The US stock market is facing two major risks that may trigger a crash of the S&P 500 and the Dow Jones. First, there are lingering concerns that the artificial industry is going through a bubble. In a recent Bloomberg interview, Jack Shelby, a top venture capital executive, warned that the forming bubble is bigger than the dot com one.
If the AI bubble bursts, there is a risk that it could sink the S&P 500 Index, as it has been a primary driver of its growth over the past few years.
The other risk facing the stock market is that valuations have become highly valued. According to FactSet, the forward P/E ratio of the S&P 500 Index has jumped to 22.6, higher than the five-year average of 19.9 and the ten-year average of 18.5. It is common for the stock market to have a valuation reset when it gets stretched.
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