S&P 500 Holds 1,000: Where to Next?

Friday marked the first day since last October that the S&P 500 stayed above 1,000 for the entire trading day. Can we hold at that level? Here's a look:

Two things are significant about this chart right now: The head and shoulders fake-out that took place between May and July, and the steep uptrend that the market's been on ever since.

A "head and shoulders" pattern is a very bearish sign to technical analysts that suggests that the market is due for a downward swing. Scores of traders watched the S&P nervously as it formed -- and many likely took short positions on the market when it looked like the pattern was going to follow through. In the end, the pattern was a fake-out, and the S&P 500 index bounced off of its 200-day moving average. It hasn't looked back since.

The fact that the head and shoulders pattern didn't materialize is significant for investors. It means that despite all indications that the market was going to take a dive, investors were bullish enough to fight the downward pressure -- and win.

And with the risk of a tumble out of the way, the market rocketed off, blowing through several key resistance areas. While that's been great for investors up to now, it should also be a cause for concern. Like we talked about back in May, an unchecked rally isn't a good thing, and this one's no different.

That said, as the S&P crossed 1,000 (a psychologically significant number for traders) it has slowed down and appears to be consolidating. If the S&P tracks horizontally for a while, we could have a decent enough base to climb even higher. That remains to be seen.

Not Following Fundamentals

Whether a climb much higher is fundamentally warranted is another question. Economic data continues to be mixed, as do earnings. Still, the consensus seems to be that investors are quite happy to be bullish until the evidence tells them otherwise. That means "mixed" fundamentals will continue to support an upward market.

According to the American Association of Individual Investors' latest polling, half of all investors are bullish right now, versus just 35% who call themselves bears. That's not a surprising statistic given the rally we're in the midst of.

Disclosure: No positions

Comments

[Ivan Kitov:]

Very impressive analysis. However, there is always a question behind every breakthrough - why? If any answer would be added to that from Finonacci, it would be more safe to invest.

Unemployment seems to reach the peak and from July starts to drop in absolute number and even faster as a portion of labor force, i.e. the unemployment rate will fall.

August or (less likely) September will be the first month with an absolute increase in employment, as the current trend shows: seekingalpha.com/artic...

So, I would expect an increasing over-pressure of good news enhanced by the background of 2008, when the market was accelerating down during the last fall (autumn - sounds not so good for 2008 ).

Aug 09 03:00 PM

[untrusting ...:]

Well you talk about investors .... but given the evidence of Goldman Sachs, JPM and about 2% of HFT dominating market volume at estimates of 50-70% of all market volume .... you must be talking about the other 30% of volume as "the investors". One has to question how long the 30% will keep buying at ever higher prices as the 70% keep churning prices onward and upward. Given that the last few months have shown the highest level of insider selling since well before the crash, one also has to wonder why the insiders have little confidence in this rally. Further, given the high amount of volume being traded (many believe manipulated) by a tiny segment of market traders one also has to question whether any traditional measures such as fundamentals, valuations, technicals, trends, or another other measure for that matter really has any meaning at this point. Reminds us of the Ralph Nader classic "unsafe at any speed". We believe the most honest assessment is that this is a traders market for those nimble and brave enough to trade it. But investment .... no, far far too risky to view this as an investable level at the current prices for the vast majority of US or even foreign equities.

Aug 09 11:44 PM

[Moon Kil Woong:]

Technical analysts have been wrong for several weeks now. When will they give up? Sure it's not an exact science, but the real question is it a science at all. A better thought would be good old fashioned logic which technical analysis is suppose to be based upon. Just like in physics, as long as nothing changes momentum is conserved and will continue until opposed by another force. In this case, until the dollar stops falling and money keeps moving towards commodities and equities why should the market correct in the short term?

The dollars fall is a very strong force. And the spending package really kicks in from here until 2010, adding pressure to Treasuries and flagrant amounts of more easy money. So naturally the market trajectory looks up. It may make bad economics and bad fundamentals, but there is absolutely no one around recently to punish anyone for it. I suppose that will come at a later date. Possibly years from now.

I can't say that I'm happy about the government's actions. They have squandered Americas wealth in the last 10 years and dug us deep in the hole and have now dumped the ball and chain of QE with us. But honestly as investors, we must take te opportunities given to us now. That's why I have remained with my holdings and added DHR. Thus I suggest picking up laggards with good fundamentals.

Aug 10 01:23 AM

[whidbey:]

The liquidity currently drive buying, and the bond market has been emptying out, so the normal technical patterns are temporally distorted....
.... but in the long run they do prevail.

A 50% rally in an economy with 6 million unemployed is a technical issue we can not ignore. The rally is not likely to last because it is early and very exploitative by the major brokers. Keep some stops in place and some cash for the crash.

Aug 10 12:22 PM

[Maxe Paul:]

Mate, technical analysts such as myself not only picked the market top in 2007, and the exact 666 bottom in the S&P, but also predicted the multi month bear market rally, including the dip in July.

There is nothing to be wrong about, it's a bear market rally, do yourself a favour, have a look, here's some links for you.

You will be amazed at this analysis.
Best free service on the internet.....PERIOD.

breakpointtrades.com/c...

breakpointtrades.com/c...


On Aug 10 01:23 AM Moon Kil Woong wrote:

> Technical analysts have been wrong for several weeks now. When will
> they give up? .

Aug 10 10:27 PM