Medium Term Outlook
I can't help but feel a little deja vu when I see the daily chart of the S&P 500 cash index. You see, the index has gotten a very nice bullish start to the year by breaking through the top of the clearly-defined triangle pattern, which developed over the course of the last four months of 2012.
As it turns out, the index started the 2012 year in much the same way, but the triangle pattern was quite a bit larger than the current version. I wrote about the 2012 triangle last year (HERE), and my analysis was fairly on point.
This time around feels similar, only I believe we're at the tail end of a very decent 4-year bull trend. More on this later.
The daily chart shows the $SPX got a clean breakout through the upper line of the triangle on the first trading day of 2013 (just like last year). So far, prices have held fairly decently just 9 trading days into the new year.
Since the backend of the triangle measures about 130 points, I'll be looking for the $SPX to approach a target of about 1,545 within the next three months, with an outside chance of reaching as high as 1,580.
Keep in mind, the S&P is currently testing a very important wall of resistance at 1,475, which also corresponds to the monthly R2 Floor pivot. If the index cannot rise beyond this level soon, we could be looking at a near-term sell-off that could spark a test of the monthly pivot range at around 1,425.
Watch 1,475 and 1,450 for short term directional conviction.
Long Term Outlook
While the triangle in the daily chart indicates short to medium term strength ahead, I'm afraid the weekly chart is giving off vibes of stalling, or perhaps worse.
Take a look at the weekly chart, and the five arrows I've drawn. The big rebound of 2009 shows a very bullish wave of price movement from the 666 bottom, complete with a nice steep slop.
The second arrow shows another wave of nice strength, but the move fell short of the distance covered during the first wave of the bull trend.
The third, fourth, and fifth waves of strength all covered vastly less distance, with each new high being relatively lower than its predecessors.
What does this tell me? The market is showing signs of exhaustion, or stalling. While the market has rallied strong for four straight years, the current price structure of the trend indicates we could be due for quite a correction ahead - one that could lead to a 20%-plus decline.
Watch 1,340
While there is no imminent sell-off danger, we'll want to keep a very close eye on 1,340, as a violation of this level could be the spark that starts a major correction. Not only would breaking 1,340 represent a break through the most recent long term higher low, but it would also be a confirmed break through the yearly pivot range (pink lines), which oftentimes spells more selling ahead.
If, or when, the time comes and a break through 1,340 occurs, look for price to test each of the first two yearly pivot levels at S1 and S2, 1,299 and 1,171 respectively, with an outside shot to reach S3 at 1,083.
Within the longer term context of this index, 1,100 should continue to hold as long term support, and could represent a very solid buying opportunity for the next major wave of strength.
In terms of timing, look for the index to remain short term bullish out of the recent daily chart triangle for the next few months. Pay attention to the month of May very closely for signs of weakness, as the well known axiom "sell in May, and go away" could be the catalyst that leads to the larger correction we've just discussed.
What are your thoughts on this analysis? Tell me what you think in the comments section below!
I'm looking forward to seeing how this one plays out!
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Just a heads up, due to popular demand I'm currently putting the final touches on a fantastic swing trading course. I'll be formally announcing the course later this week, so keep your eyes and ears peeled.
Cheers!
Frank Ochoa
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