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S&P 500 Approaching Key Resistance

06/07/04 09:43:40 AM
by Kevin Hopson

A potentially bearish pattern and key resistance could both spell a near-term reversal in the S&P 500 Index.

Security:   SPX
Position:   N/A

The S&P 500 Index (SPX) has rallied nicely off of last month's low, moving above the green Andrew's Pitchfork's median line and top parallel line of the black pitchfork in the process. The index has also moved back above its 50-day moving average, which is now acting as short-term support. However, the index appears to be forming a bearish flag, while at the same time coming up on key resistance.

Notice that the index is forming a pattern of higher lows and higher highs after last month's breakout, as illustrated by the red trendlines. You normally want to see prices trade sideways or pull back after this type of move. Because prices have been trading in a rising channel formation and the move higher has occurred on declining volume, the current pattern is potentially bearish.

Graphic provided by:
Additionally, the index is coming up on key resistance, with the 61.8 percent retracement level (1130) from the March high to the May low, turning back prices this past Friday. As you can see in the chart, the top green parallel line (or April's downtrend line) is converging right above this level - around 1135. Given the bearish flag formation and near-term resistance in the 1130 to 1135 range, the index could see a reversal soon.

I have seen bearish flag formations unexpectedly break to the upside before, which is why I would keep an eye on the index before committing to the short side. If the index can break resistance in the 1130 to 1135 range, prices could eventually make their way up to the 1150 level. This is the site of April's high, as well as the blue median line. In the meantime, I would err on the side of caution and only look to get bullish on a break of the 1135 level.

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.

Glen Allen, VA
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