The area between 1,345 and 1,370 on the S&P 500 served as resistance three times in 2011. And after the latest rally that started in December, here we are again right in the middle of this zone.
In 2011, the 1,345-1,370 area formed a nice head-and-shoulders pattern that in early August hit its ultimate target around 1,150.
After chopping around for two months, the index finally found a tradeable bottom Oct. 4 at 1,075. Stocks then proceeded to rally a quick 20% and paused at the 1,280 area in late October. From there, the S&P 500 built an inverse head-and-shoulders pattern that ultimately broke out in late December and led to the 8% rally the index has seen thus far. The textbook target for this inverse head-and-shoulders pattern is 1,360, which we reached Friday, Jan. 17.
And so here we are right in the middle of the 1,345-1,370 range, and right at the target level of this latest inverse head-and-shoulders level.
Another important reason why the 1,360 level (plus/minus 10 points) has acted as good resistance is because it is the exact 76.4% Fibonacci retracement level of the move from the late 2007 highs to the early 2009 highs.
A simple rule of technical analysis states that the more a level gets tested, the weaker it gets — and hence, it ultimately gets broken. I believe this will be the case, and the S&P 500 will move toward and possibly above the 1,400 area at some point in 2012.
However, given the steep ascent stocks have made during the past two months (all without any meaningful pullbacks in price), a price correction is needed first. A correction of anywhere from 3% to 6% would take the S&P 500 somewhere between 1,280 and 1,330. From there, the index will have a better chance at hurdling itself above the 1,360 area and staying there — at least for a while.
So there you have it: 1,360 is likely to ultimately fail as resistance, and a pullback of a few percentage points beforehand would make that break all the stronger.