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August 31, 2012 at 08:55 PM
As the U.S. stock market marches higher, a level of 1,420 for the S&P 500 (SPY) is sign for both bulls and bears. Let’s analyze why.
Since the June 4 price lows, the S&P is admirably up over 10%. Since then, prices peaked at 1,426 and have closed as high as 1,417. Now around 1,410, how much higher will this market go and can it close above 1,420?
July Chop
In the August 2012 ETFguide Newsletter’s Short-Term Market Meter of July 20, we included the following update for our subscribers:
“The rally from 6/4 continues to grind higher as it approaches resistance at 1,390. If prices can break 1390, the May and April highs of 1,410 and 1,420 are the next resistances, but that is looking less and less likely. In the past month, the S&P 500 has made four separate 50-point overlapping moves (down, up, down, and up) which shows the lack of conviction in this up move. Breadth and momentum indicators are also not confirming the price moves, which are warning signs for bulls. We are looking for at least a short term top soon.”
Soon after we published this, stock prices continued to fall from 1,365 on July 20 to a bottom of 1,330 on July 24.
In addition to looking for a short-term top, we also identified the 1,390 zone as resistance that could eventually come into play. If 1,390 were to fail as resistance then 1,410-1,420 would be the upside target.
Why were the upside targets chosen, and what does 1,390 have to do with it?
The 1,410 and 1,420 prices are the previous highs from both April and May, and they are also the highest price since early 2008, last occurring before the worst part of 2008’s selloff.
In fact, 1,390 was the price where a trendline from those highs was coming into play and providing resistance.
