Looking Ahead: The S&P 500

As a reminder, this series of articles as a collection are intended to help frame the potential outcomes of the coming 12 months or so of the global markets. They are not intended to be a forecast per se, but to provide longer term deeper insight based on the current market structure. Each article is complete in itself, but the series together will provide a whole world focus, and as usual they will focus on price action, meaning there will be charts. Full schedule is here.

S&P 500, SPY

The S&P 500 has long taken over the mantle as the most influential index from the Dow Jones Industrial Average quoted by most news sources. Traders and investors watch the Dow but trade the S&P. The 15 year monthly chart for the ETF which tracks the S&P 500, SPY, is below. Incidentally this was the first ETF ever created.

This chart has many different concepts playing out. First is the second test of the 61.8% retracement of the major down move from the 2007 all time high to the March 2009 lows. The first time it hit the level in April it was rejected back below the 50% level. But on the second attempt it has broken through and now appears heading higher. Keep in mind that these Fibonacci levels are very close to those that would measure a retracement of the previous up move from 2002 to 2007, as the bottom of that move started at nearly the same place as where the March 2009 low settled. This creates Fibonacci bands of double resistance and support. The second thing to note is that that first test of the 61.8% retracement coincided with a rejection of the 50 month SMA. This has also been overcome on the second push and SPY is now above all of its monthly SMA’s. Additionally the 20 month SMA has just crossed higher through the 100 month SMA adding to the bullish case. The SMA’s as now lifting, as is the MACD and the RSI. In fact the RSI has been trending higher since the March 2009 low and still has a lot of room questions start to arise on the monthly chart about overbought signals. This month’s candle is now pushing the tightening Bollinger bands higher. From an Elliott Wave perspective it appears that the major downward move was a A-B-C corrective wave pattern and that SPY is now in wave (III) of a new impulse wave higher. Finally note the influence of the Fibonacci fans and arcs since making the all time high in 2007. The move down saw support early at the intersection with each fan line, as all were above the arcs. After overshooting all of the arcs and retracing the entire 2002 through 2007 up move plus a couple of points, they fans and arcs did not provide any influence until shortly before the first cross of the two at the April 2010 highs. Notice that SPY started to hug the last arc as it hit it, and then rejected lower when it hit the fan line, only to be caught by the next lower arc and is now moving higher.

S&P 500, SPY – long term forecast 172

The trend on the SPY is higher and the technicals all look positive so it is no wonder that despite being up nearly 100% off of the bottom that the target is still much higher. There are 4 method that can be used to triangulate on this target. The first is to presume that a full 100% retrace or more, 161.8%, of the down move occurs. This give a very wide target though between 147 and 197. The second method involves using the move from the bottom to the April high and presuming either a symmetrical move higher in this leg of 56 points to 156 or a 161.8% measured move higher creating a target of 190. Again this is a large range but a little tighter. The third method uses the Fibonacci fans and arcs. I have traced this move in dotted black. This method suggest a move along the fan line to the upper right now, until it hits the arc at which point it may ride the arc up to the 100% retracement level at 146. Then a further move along the fan up to the right to the arc line near 180. It may start wave (IV) at that point. So three methods give a range from 146 to 197. This range can be tightened by extending the green trend line from the 2009 bottom that touches the bottom of wave (II) higher to see it crosses the path and fan lines at about 172. An interesting footnote is that if this is wave (III) of a five wave impulse the ultimate top of wave (V) could be at 200 or higher. Finally, as a check and for the point and figure fanatics, a 3×1 reversal chart with 2 point box size has a current target of 166.

(As always you can see details of any individual charts and more on my twitter feed and on chartly.)

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The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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