The market continues to rally, with the S&P 500 closing out the day at 1520.33. That is higher than I expected this market to go; back on December 16 I indicated that a move back above 1430/1440 was unlikely, but, if the market managed to keep rallying above 1474 then expect further price appreciation. It is now clear that stocks had more buying interest than I anticipated. While this wave higher has been tradable, for anything beyond short-term trading I still remain pessimistic on this market on a longer-term basis. Short-term though there could be a bit more room to go–actually about 60 to 80 points on the upside for the S&P 500. The chart below shows why.
Figure 1. S&P 500 Monthly Chart – Broadening Range (click to enlarge)
Right now, the most important technical pattern is this long-term broadening triangle or range the S&P 500 has been making since 2000. This is relevant to both short and long-term traders as the index nears the upper threshold of this pattern. In 2007 the S&P 500 made a high at 1576.09, and now that we are nearing that mark, I expect it to act like a magnet. If the index surpasses it, then a move up to 1600 is likely.
A further rally above 1600 is likely unsustainable for any length of time. Volume has continually declined since the 2007 high. There just isn’t enough interest to keep pushing this market up.
I will play devil advocates though (against myself) and admit that there is something that bothers me about my view of declining volume being a drag on the market. Obviously the market can move up on declining volume…it has since 2009! And I believe this has occurred because stocks are in “stronger hands.”
When the general public in mass is interested in buying stocks (and they haven’t been for the last few years), those are the most fragile times for the markets since individual investors are often quick to panic and they speculate on margin, leaving them exposed and forced to dump shares if the market turns against them. So with that in mind, on a theoretical level I almost want to see a surge higher in the index accompanied by a surge higher in volume. To me that would be final nail in the coffin–to put it bluntly–as the general public almost always picks the wrong time to buy stocks.
So with that said, volume is not always the best or most reliable indicator, and is definitely not a timely indicator. Therefore, the primary focus is the broadening range and the major resistance it provides in relatively close proximity to the current price.
If the price doesn’t make it to between 1576 and 1600, then look out below. A drop below 1340 to me would indicate we are in for a much larger slide. Below 1260, and it is highly likely we go well below 1000.
If we rally aggressively above 1600 I would consider that a long-term bullish breakout and would need to adjust my outlook and strategy going forward.
Short-term, the S&P 500 could have another 60 to 80 points left in the rally. Long-term though I am looking to take short position between 1550 and 1600 if a reversal signal develops (not before).
While these are my views, it is not a recommendation for you to buy or sell. Please consider your personal situation when making investment decisions, as this is not personal investment advice.
Cory Mitchell, CMT
Several months ago I was introduced to a piece of financial research software…and I have been using it ever since.
It’s called TradeMiner, and basically it allows me to quickly and easily see any trends or tendencies in stocks, currencies and futures.
Simply put, it helps find historical market patterns and cycles that have repeated on a consistent basis over the last 5, 10, or even 25 years or more. Combining the power of this research with my own technical trading methods has been a powerful combination.
Easy to use, this software generates loads of trade ideas and can basically be used in conjunction with, or in addition to, any trading system or strategy.
TradeMiner has three versions, Stocks, Futures & Forex So there’s something for everyone: