With stocks up big year-to-date and most indices at or already somewhat above critical levels, it’s time once again to review the charts of the broadly followed S&P 500 for potential clues as to whether we’ll see some near-term blues.
As of Friday’s close, the S&P 500 was higher by 9.43% for the year; it was about five points away from the index’s all time closing-high of 1565, and 15 points away from its all-time intraday high at 1575. As such, arguably, the all-time highs have now been retested.
Question is, now what?
If we pull up a weekly chart of the S&P 500 back to the late 1990s, we note that with last week’s rally, the index actually completed a triple top, or at least so the myth goes. After trading and following markets for close to 15 years, I can tell you that such “triple tops” rarely exist, and when they do, it’s only a matter of time until the resistance level finally gets driven through. In other words, while some consolidation might soon be in order at current stage in the rally, eventually the 1575 level will give way to higher levels and the so called triple-top will again not stand.
On the multi-asset chart below, I overlaid the S&P 500 with the iShares Dow Jones Transportation Average Fund (NYSE:IYT) as well as the KBW Bank Index (BKX). What we are seeing is that all three indices are currently extended both in terms of percentage appreciation, slope and duration of a rally without any meaningful “correction” in price. Healthy markets consolidate and correct, and at the moment, U.S. equity markets are lacking such action. Since 2010, there have been numerous rallies, each lasting three to four months and resulting in price increases of around 15%. Since November 2012, the S&P 500 has rallied a little more than 15% in four months … so at least compared to markets since 2010, it is overextended.
Bottom line: Don’t just blindly buy a potential breakout attempt by the S&P 500 past the all-time highs. The prudent course of action at these crucial and lofty levels in the index is to remain patient and expect choppiness, as everyone is watching this level. Chances are very good that this third try at the area around 1570 will ultimately succeed, and the market will break higher.
In the meantime, once stocks are ready to pause some before moving higher again, how far could the S&P 500 correct?
In my work, I prefer to set simple reference areas as opposed to exact points; technical analysis, in my humble opinion, is more of an an art than a science. Two areas of support I am watching: 1) The February lows near 1485 and 2) The late December 2012 lows near 1400.
Serge Berger is the head trader and investment strategist for The Steady Trader. Sign up for his free weekly newsletter here.