Tuesday, March 5, 2013

What Lies Ahead (or Above) For SPX

With the DJIA making an all-time high today, what lies ahead for SPX?

Monthly: The first chart is a 16 year monthly view of SPX. The green band is ~10% wide with a top at 1555, less than 1% from where SPX is today.

SPX first rose to 1553 in March 2000 (first green arrow). Note that traded in a ~10% range the next 8 months. Interestingly, seven years later, SPX rose to nearly the exact same level, reaching 1555 in July 2007 (second green arrow). And, just like in 2000, SPX once again traded in that ~10% range for 8 months. This is an area, in other words, with a lot of trading activity and, apparently, strong resistance at the top of the range.  Only one month after reaching 1555 in 2007, SPX lost 12% (red arrow).

SPX went on to make a new higher high 3 months later in October 2007 at 1576 (blue line).  Based on the past trading history, we should expect resistance in the 1555-76 area and be prepared for the potential for a wide, volatile trading range.

Weekly: The next two charts look at SPX on a weekly basis over the past 10 years. Note that, in the past, when the RSI (5) exceeds 85 (yellow band, top panel), SPX's upward momentum has stalled. Coincidentally, SPX reached an RSI (5) of 86 today.

In the best cases (2003, 2004 and 2007), SPX makes no net progress over the next 8-15 weeks. In the worst cases (2010, 2011 and twice in 2012),  SPX declines ~10% or more over the next 3 to 6 months.

Taken together, the monthly and weekly suggest SPX is reaching (within 1-2% of) a prior area of strong resistance just when its upward momentum typically begins to fade.

Daily: The last chart is a daily view over the past 2 years. It's an update from a prior post on how tops typically form (here). 

As noted before, there are two discernible steps.  First, after a long run, momentum starts to weaken and price tests a key trend line or moving average (green arrows).  Next, price pushes higher, falters, tries a third time and makes a double top or lower high (yellow area). 

Last week, SPX clearly completed what would seem to be the first step by pushing down well through its 20-dma. If the pattern repeats, SPX should move higher. The key tells that the topping pattern is unfolding will be trading becoming choppier over several weeks and the 20 and 50-dma flattening and converging.  We should expect it, given the month and weekly charts, but it's not there yet.