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FIBONACCI


Does The S&P 500 Have A Seasonal Shot At 1220?

11/03/10 08:31:40 AM
by Donald W. Pendergast, Jr.

The stock market is truly independent with no real agenda to push, and very hard to get a straight answer from at times. But it may be tipping its hand, offering traders a fairly low-risk long setup.

Security:   .SPX, SPY, ES
Position:   N/A

Even though the Standard & Poor's 500 (.SPX, SPY, ES) has had a terrific two-month run out of the August 2010 low, there is still some room for this index to run up toward 1220 in the next few weeks. Figure 1 is a closer look, using the daily chart of the .SPX.

FIGURE 1: S&P 500, DAILY. Given the reliably bullish year-end seasonal cycle now in effect, the fact that the trend strength is still in the strongly bullish phase adds some extra credibility to this long trade setup in the S&P 500. The resistance area near 1220.00 will likely offer significant amount of resistance.
Graphic provided by: MetaStock.
Graphic provided by: MetaStock v.11 CS Scientific Expert advisor.
 
When you put a few dissimilar pieces of the S&P 500's technical puzzle together, we arrive at a very real conclusion: the index may be in prime position to make a quick runup toward the next major resistance level at 1220.00.

1. The CS Scientific Expert indicator in MetaStock (the bottom of the chart) remains in the strongly bullish camp. When this indicator goes gray, a powerful uptrend has been confirmed.

2. The entire broad US market is already in a very bullish seasonal cycle, one that began about a week ago, based on a reliable 29-year pattern.

3. The .SPX has decisively closed beyond the Fibonacci 161.8% extension level formed by the last significant downswing (August's four-week selloff); this is a mildly reliable hint that the index may have enough steam left to reach the Fibonacci 200% extension level near 1220.00, which also happens to be virtually the same price level as the major high seen in April 2010. This will surely be an area of powerful (if only temporary) resistance, with plenty of fake-out histrionics in evidence should that price be achieved sooner rather than later.

Right now, traders should be on alert for a daily .SPX close above 1196.14 (dashed red line on chart), at which point they may wish to go long the index with a sell limit target of 1220.00 and an initial stop just below the 10-day exponential moving average, Marty Schwarz's famous "pit bull" moving average, near 1182.00. The pit bull is used by many intraday traders to help determine the short-term trend bias of a given market, and for such a short-term daily swing trade setup like this, it should also work pretty well. Using these hypothetical prices, the trade setup yields a risk-to-reward ratio of about 1.96 to 1, which is excellent.

Those who prefer to trade stocks can use the same 1196.15 breakout level as an alert to start scanning for the strongest relative strength stocks versus the .SPX over the past 13 weeks (one calendar quarter). More aggressive traders (daytraders) may wish to start adding long positions and a 30-minute close above 1196.14, while more conservative types (swing traders) should probably wait for a daily close of the index above that price level.

By now, you should already have a basic understanding of how to manage such stock positions -- you can use the .SPX target and stop previously mentioned as a proxy for your stock entry and entry points, or you can run something as simple as a Gann swing line (a simple moving average of the daily lows of the previous three price bars) as a trailing stop. The Gann swing line technique works very well on stocks that feature relatively smooth cyclical price action as well as on those that tend to move in powerful trends every few months.

In case the break higher on the .SPX fails, reasonably strong support exists near 1160.00, which may unleash a period of sideway consolidation action -- or not.

Time alone will prove out all stock market assertions, opinions, and delusions, as always.



Donald W. Pendergast, Jr.

Donald W. Pendergast is a financial markets consultant who offers specialized services to stock brokers and high net worth individuals who seek a better bottom line for their portfolios.

Title: Writer, market consultant
Company: Linear Trading Systems LLC
Jacksonville, FL 32217
Phone # for sales: 904-239-9564
E-mail address: lineartradingsys@gmail.com

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