A Longer Perspective In……. S&P 500

• Posted by Greg Harmon
• on December 31st, 2013

A year end series taking a longer perspective in many market indexes, macro related commodities, currency and bonds. Over three weeks these reviews are intended to help create a high level road map for the the next twelve months and beyond. We finish today with the S&P 500 ($SPY, $SPX).

The S&P 500 has long ago replaced the Dow Jones Industrial Average as the benchmark index for most managers. And for good reason, its broad constituency gives it enough diversification among the large cap names to give a clear understanding of market direction. 2013 was a breakout year for this index, breaking a 15 year channel of price action and continuing the move higher since the bottom of the financial crisis. It has climbed a wall of worry the whole way and there is still a very low participation rate among individual investors. The monthly chart below shows that channel and projects a target of 2400 on the break out above it on a Measured Move. Another 550 points to go. Wow! This can be roughly confirmed by using Elliott Wave principles as well. Since the 2010 bottom the price action has been in Wave III of the impulse higher. This is often the strongest wave. The fractal nature of Elliott Wave shows this is also Wave III since October 2011 and Wave v within that Wave III. All that means is that it could make an interim top shortly at 1923. That would be supported by the Relative Strength Index (RSI), currently technically overbought, reverting lower. The next wave, Wave IV, would be expected to be very flat as it usually is opposite in nature to Wave II, which was down. Using a 5%

correction would bring it back to about 1820 before the Wave V higher to complete the bigger Wave III. All this says that 2400 can be seen from 2 different perspectives. The weekly picture can help fill in some of the details along the way, and I promise no more Elliott Wave. The chart below shows that the S&P 500 has been in a rising channel, narrowing very slightly, since the November 2012 launching point. Currently it is at the top of that channel and with a RSI that is hovering around the technically overbought level at 70 it would make sense if it reverted to towards the bottom of the channel. The 20 week Simple Moving Average (SMA), also roughly the 100 day SMA, has acted as support and is just above the channel bottom. That would be a target entry point on a hold there if it does pullback. All of the SMA are rising and have

good separation, as they move higher in a parallel fashion with the price channel. This is a strong trend. The daily chart though suggests that it may not get that low in the near term. The S&P broke a rising wedge from July in October, retested it and has moved higher. The recent break out of the yellow box has a Measured Move to 1848, about where it is now, and near the round number 1850. So there should be no surprise if it consolidates here or pulls back a bit. But even this timeframe sees the Measured Move higher to the 1925 area. So the outlook for the S&P 500 looks bright as we head into 2014. A near term pullback may start the year off against many expectations, but the longer term looks like the strong tend continues. It is hard to see a defining point where this analysis would be wrong, but if forced to pick one I would suggest under 1745.

Previously in the Series: A Longer Perspective In…….
Copper
The Philadelphia Semiconductor Index
Shanghai Composite
The Dollar Index
Crude Oil
Gold
US Treasury Bonds
Japan
Germany
Russell 2000
Nasdaq 100

The 2012 Series: A Long Term View On…..The Full Series
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