|The Standard & Poor's 500 index (SPX) has made some significant progress since early September (Figure 1). For example, see how prices broke out of the top half of the black pitchfork in late summer. This was a sign that a short-term bottom had likely been put in. After this, the index consolidated in the lower half of the blue pitchfork until early November, at which point prices broke out again. More specifically, the index moved above the blue median line and has recently been bumping up against the top green parallel line (resistance).|
Figure 1: S&P 500, one-year chart. The Standard & Poor's 500 index has made some significant progress since early September.
|Despite the significant runup the past three months, the rally may not be over. I say this because the index appears to have formed a bullish triangle, as illustrated by the purple trendlines. Symmetrical triangles tend to act as continuation patterns. Since the index rallied prior to this formation, there is a good possibility that prices will move higher again; in fact, the index is breaking out as I write this. A breach of the purple downtrend line (top of the triangle) around 1185 would confirm an upside breakout.|
|Figure 2: S&P 500, 2000-04|
|Graphic provided by: StockCharts.com.|
|Another reason I would look for higher prices in the near term is because the index took out key resistance at 1160 a few weeks ago. If you look at the long-term chart for the SPX (Figure 2), you will note that this was a significant retracement level for the index -- more specifically, it was the 50% retracement from the 2000-02 decline. This retracement level turned back prices early this year, but now that the index has overcome resistance, the next upside target could be 1253. This is the site of the 61.8% retracement from the 2000-02 decline. As a result, if the index breaks out of the current triangle formation, I would look for a possible move up to this price level (1253).|
|Glen Allen, VA|
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