Wed 18th June

With the proverbial ‘calm’ before the ‘FOMC and BoE storm’ I thought I’d take a look at the S&P500 and try to identify potential targets for both bullish and bearish movement options. This heavy weight index is currently paused just under its major high but above a significant triangle breakout region:

The S&P500 made another bullish ascending triangle breakout when it finally punched up through the 1,900 level. This bull run has been continuing since Nov 2012 and the daily support trend line (above) shows this quite clearly. Trends don’t continue unabated forever and, eventually, this trend will have to take a major pause and will pull back but, the big question is, when? No one can predict the ‘when’ of any pull back but what I am going to try to do is to identify the ‘where’, or target, of any potential pull back.

The daily chart above shows the daily support trend line has held price since Nov 2012. Popular targets for pull backs are often assessed from fib levels and a popular fib level is the 61.8%. Any pull back on this index conforming to a 61.8% fib retracement would bring price down to a very significant level at the 1,577 region. This is significant because this is also the major high from back in 2000 and 2007 (best seen on monthly chart below) and, thus, carries some psychological component or ‘baggage’ as well. The other point to note is that any such move would bring price down to the region of the monthly support trend line. 

Thus, I will be on the lookout for any break down through the daily support trend line before being being too concerned about a major correction. For any breakdown through the daily trend line though I would then be looking for a possible move back down to the 1,577 region as this is the previous high, 61.8% fib and the monthly support trend line.

That takes care of bearish targets but what about any bullish continuation and targets there? For that we need to take a look at the monthly S&P500 chart. This chart shows that the index made an earlier bullish ascending triangle breakout back in April 2013 when it made a monthly close above the previous high of 1,577. The theory with these breakout patterns is that the height of the projected bullish move can be estimated from the height of the original triangle. The height of the S&P500 triangle was approximately 900. This is a rounded up value from a move of 700 to 1,577 or 1600. Thus, the projected possible bullish continuation move here is measured 900 points above the 1,600 level. This makes for a suggested target of 2,500. This target is a bit similar to the target suggested by the Elliott Wave indicator on my software:

Summary: No one is able to predict when the S&P500 will correct but there is little doubt that the day will come when price will eventually retrace somewhat. It is that ‘somewhat‘ that I am more interested in. I have looked for possible areas of confluence of signals to suggest possible targets for any bearish pull back and, also, for any bullish continuation.

Bearish target: I will look for a possible move back down to the 1,577 level following any serious pull back through the daily support trend line. This is the region of the 61.8% fib level, a previous high from 2000 and 2007 and the region of the monthly support trend line.

Bullish target: The S&P500 made a bullish ascending triangle breakout back in April 2013 and the theoretical move for any bullish continuation here is 2,500. Thus, I won’t be too surprised to see price head to this region.