I am still working out details on the new course of this blog with individual stocks names as well as sector analysis as time progresses, but for now it is time to look at perhaps a critical junction in the price action of the $SPX (S&P 500 Stock Index).
As stated previously in this blog, I had anticipated either a deep correction followed by a rally, or a continuation of the current rally followed by a serious correction. It looks, for now, like option 2, the rally, is occurring so far in 2012. One of the things you must learn in my opinion as a trader is that there should be a primary focus in technical analysis, as John Murphy has written about on several occasions. That primary objective is to set reasonable price objectives when holding a long or short position in the markets.
Under the current price action, we could have three very possible bullish outcomes:
1) Price symmetry at a point of resistance. Look at this monthly chart. What you see an example of here is AB=CD price symmetry. The retracement level from B to C is 0.618 the length of price segment A to B (form the low of A to the high of B). If that holds true, we should see a target high of around 1370.58. That is right at the cycle high set in April of 2011.
2) One of two butterfly patterns could play out. One would end at 1427.94, and the other at 1451.04. The retracement of A to B is roughly 0.786 of the X to A down move. Both of those patterns should end in a later reversal which means both patterns are bearish in nature.
Which one will it be? Well, the momentum indicator I use still sees the $SPX bullish in daily, weekly, and monthly time frames. The neural nets also are still bullish on a daily basis, though the current daily rally is extended a it.
On an inflation adjusted price/earnings ratio basis, the$SPX cash index is quite extended also at a value of 21.97 at the time of this writing.
Conclusion: I still think that if any short-term euphoria remains, the resistance level at 1350 to 1370 is achievable in the coming couple of months. After that, however, any extension of the market toward new highs will essentially exhaust what ever future return could be achieved over the next couple of years after that (2013-2014). The return from 1258.86 to 1427.94 is about 13.4% and to 1451.04 would be about 15.2% . Nothing says this cannot happen (does anyone remember the ridiculous returns of the late 1990s?), but I think to expect something beyond that level completely ignores the difficulties in the Eurozone and the world-wide problems associated with sovereign debt.
For now, I think the 1356.48 to 1370.58 level will be a point of exhaustion, with an outside possibility of 1451.04 at a bearish butterfly completion. I have no clue whether this will happen, but I do know that the analysis that I have done is consistent with profitable trading practices I have used in the past. These extensions and pattern completions are highly repeatable in various time frames, so that is my story, and I am sticking to it.
More will come soon. The neural nets are back in gear again and as I see particular stocks or sectors that begin to look appealing, I will report on them.
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{ 4 comments… read them below or add one }
I’m seeing elliot wave people talking about us reversing here on the $spx in a vicious wave 3 lower. Any thoughts on that? Thanks!
Andre:
I saw a similar argument that actually showed that a 5 wave extension would also lead to a similar result. Over the next week I will see if I can pinpoint the article. If you have read previous posts I have shown one series of Fibonacci patterns like the one I use that would lead to a similar result. I think the odds increase for a significant correction (both on a technical and a valuation basis) if we see an early rally into the target highs I projected here. That pattern is a bearish pattern and could lead to a nasty sell-off. Since it has yet to complete, I try to be patient before running the estimate. If the pattern completes, however, then you need to be prepared to take action. More on that soon.
$spx 1350 to 1370 high? Or the 1400′s you mentioned.
In the 1400s. Let me see if I can find that reference article for you this weekend. There are lots of ways to look at it and most are equally valid as target estimation vehicles. I just apply statistics to mine so that I know what risk I am bearing if I trade.