S&P500 short-term outlook

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Key points

  • S&P 500 could rise further if upswing momentum continues.
  • But odds are higher that resistance will be found followed by another sharp retracement.
  • For the primary bull market to continue, a big breakout by the index is required.

Over the last month, the S&P500 has had a sharp fall followed by a sharp rise, as have most other equity indices around the world.

Two weeks ago, I suggested that equity markets had a little further to fall and that there was a high probability that this would be followed by a short sharp rise of an equivalent but inverted gradient. This is precisely what has occurred. But where, in the short-term, could the US equity markets lead the rest of the world equity exchanges from here?

S&P500 chart patterns

The daily chart below stretches back just over a year to September 2013. The solid black horizontal line protruding from the bottom left corner shows the previous S&P500 all-time high achieved in 2007. While the S&P500 remains above this level, it is in secular bull market territory.

The red upward slanting trend lines define a channel in which the S&P500 has been moving for more than two years since May 2012. In early October, the first signs appeared that the lower support line of the channel was no longer going to be respected.

Source: Beyond Charts

The blue horizontal rectangles are support and resistance zones that have formed over the past year where prices have halted after short-term upward or downward moves.

The green line is a 50-day simple moving average (SMA) and the navy blue a 200-day simple moving average, or a 10-week and a 10-month SMA, respectively.

The two solid black diverging trends lines at the top right of the chart form a reverse symmetrical triangle, also called a broadening top. This pattern has a reputation for being a bearish pattern.

The last pattern is the downward trending channel bounded by a declining magenta trend line on the upper side and the declining black trend line on the lower side (also the lower line of the broadening top).

What does it mean?

First up, it should be stressed that a long-term up trend is still most definitely in place. Over the last year, this recent dip has been almost exactly a 38.2% Fibonacci retracement of the 12-month rise. For some time I have been stating on Peter Switzer’s TV show that we should expect such a retracement, as one hadn’t occurred since May 2012. Well now it has.

Next, the Friday 24 October close on the S&P500 has coincided with the 50-day SMA, the upper boundary of the downward channel (the declining magenta trend line) and the upward slanting lower trend line of the rising two-year channel. Hence, expect some resistance at the current level.

If this upswing has further strength, the S&P500 could rise further to the next resistance zone overhead, the blue rectangle, or even to the upper rising trend line of the broadening top. Such a move would be a huge show of strength, being a near 100% upward retracement of the recent decline.

The odds are higher that resistance will be found before heading that high. Regardless of where resistance is reached, expect another fairly sharp retracement. And then expect support for that fall to be at either of the horizontal support zones shown on the chart or, in worse case, all the way down to the lower declining trend line of the broadening top, which is also the lower trend line of the downward channel.

Ultimately, for this primary bull market to continue, the S&P500 will have to breakout to the upside of the broadening top and the uppermost horizontal resistance zone. Alternatively, a fall below the lowermost blue rectangle support zone would see a serious fall in the S&P500.

Gary Stone is the Founder and Managing Director of Share Wealth Systems.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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