Thanks to last week’s marginal upside squeeze in stocks, the S&P 500 has managed to snuggle up to 2012′s highs, leaving bulls and bears alike hopeful they will be proven right.
Given the importance of the S&P 500′s level, lets look at the charts to make the index’s current crossroads more translucent:
On the weekly chart, we note that the index has risen well more than 110% off the 2009 lows, from the chilling 666 level up to last Friday’s close at 1,472. At this stage, the S&P 500 is “only” about 7% from 2007 highs — something many naysayers never would have imagined in their nuttiest dreams, even just 12 months ago.
A little more medium-term, on a chart looking back to the October 2011 lows near 1,075, the index has behaved amazingly well according to technical analysis 101 … unless, of course, one was fighting this rally. In fact, the October 2011-January 2012 period turned out to be one of the best times for applying basic Fibonacci retracement levels to swing-trade this market. The market routinely rallied for several months, then consolidated — and each time the all-so-important 61.8% Fibonacci retracement level acted as support.
On the following chart, note the series of higher lows and higher highs, each of them having formed at the 61.8% Fibonacci retracement level of the previous swing:
Instead of walking through all of the swings drawn on the chart, let’s focus on the most recent two. The swing from the June 2012 lows up to the September 2012 highs has not yet hit its upside target, which I have at 1,527. After hitting a 2012 high in September, the S&P 500 corrected roughly 9%, until it found solid support at the swing’s 61.8% Fibonacci support level. A simple extension of this move gets me to the target up near 1,527 (give or take a few points).
The next smaller swing from the November lows up to the mid-December highs then retraced 61.8% in late December, where it again found iron support, leading to this most recent leg up to near the 2012 highs.
From a momentum point of view, the S&P 500 certainly is extended here in the short-term. However, we would be wise to remember that overbought levels can hold for longer than many traders can stay liquid, and as such, the mantra of “don’t fight the tape” is front-and-center in my mind.
Additionally, medium-term oscillators on the daily charts, such as the RSI and the McClellan oscillator, do have further room to the upside.
Technically speaking, the S&P 500 continues to act well. While a minor correction might be overdue, looking out a few weeks to two months. the index has a good chance of pushing higher. If and when the index runs out of steam for a longer period of time, it will become clear by looking at daily and weekly candlesticks and divergence between price and oscillators.