Yesterday, the S&P 500 closed above the 2000 level for the first time and has formed a potential double top pattern. The first top (around the 1991 area) helped trigger a move that also drove prices towards the 100-day SMA. While earnings season was fairly upbeat, the crises in Ukraine, the Gaza Strip and Iraq helped safe-haven flows and slowed down this record rally. The one key reason why stocks refuse to break is the expectations that the ECB will soon begin purchases of asset backed securities and the BOJ might increase their stimulus to their respective economy and thus benefit the global economy. The Fed has helped support US and global stock prices and now and while tapering is almost complete, the other central banks will provide a good backdrop for higher prices.
Historically, the S&P 500 has had major corrections of 5 and 10% every 7 or 26 months. You can see from the monthly charts that price is tentatively breaking out above the 141.4% Fibonacci expansion level. If price is able to finish the month above the 1952, the bullish trend may continue and target 2041, which is the 161.8% Fibonacci expansion level of the summer slide.
Long-term support may target the 100-day SMA which also coincides with multiple key trendline support levels. The important 200-day SMA (currently at 1876) has not had a candle trade through it since November 2012 and if price can close below that threshold for several trading days, a bearish correction may continue and target the key 1750 area.
The trade: Buy S&P 500 at 1938 with a stop loss at 1858 and a take profit at 2210 The Risk/Reward Ratio is 1: 2
Edward J. Moya
WorldWideMarkets Online Trading