How High Can the S&P 500 Index Go?

09/16/03 10:14:43 AM

by Kevin Hopson

The S&P 500 broke out of two-and-a-half month trading range early this month, indicating the potential for higher prices in the near-term.

Security: SPX
Position: Accumulate

The S&P 500 Large Cap Index (SPX) has been on a tear since mid-March, appreciating roughly 30 percent since then. Despite the impressive run from March's lows, the index looks poised to move even higher, the primary reason being this month's trading range breakout. More specifically, the S&P 500 was stuck in a trading range between 960 and 1015 most of the summer before recently moving higher. Now that the index has broken to the upside, higher prices should prevail.

To get a grasp on just how high the S&P 500 can go, refer to the index's one-year chart below. For example, notice how the index tested the upper channel line two times prior to breaking out. If you count the actual breakout point, the S&P 500 tested the upper channel line a total of three times. Keep this number in mind, as it will be used to calculate the target price range. The next step is to calculate the width of the trading range, which is the price of the upper channel line (1015) minus the price of the lower channel line (960). This equals 55.

Graphic provided by: Stockcharts.com.

Once this is done, multiply the trading range width (55) by the number of times the index tested the upper channel line (3). This equals 165. To determine the target price range, add this number (165) to the bottom (960) and upper (1015) channel lines. When you do this, you come up with a potential price target of between 1125 (960+165) and 1180 (1015+165). This means that the index has another 10 to 15 percent of upside potential in the short-term.

Since the S&P 500 is currently testing the upper channel line (prior resistance) and there is additional support in the 990 to 1000 range, site of the index's 50-day moving average and the bottom black parallel line, there only appears to be 2 to 3 percent of downside risk in the near-term.

Kevin Hopson

Kevin has been a technical analyst for roughly 10 years now. Previously, Kevin owned his own business and acted as a registered investment advisor, specializing in energy. He was also a freelance oil analyst for Orient Trading Co., a commodity futures trading firm in Japan. Kevin is currently a freelance writer.