Tuesday, 21 February 2012

S&P500 Index near 2011 Highs

The S&P500 Index has now approached the highs of 2011  and of the whole bull market which started from the deep March 2009 low. This is a very significant resistance level. Note that this level also matches two yearly lows back in 2007. This level is the absolute key feature to watch on major US equity indexes from a technical perspective and any valid breakout or reversal can have huge effect on other macro markets and on the general risk on vs risk off trade.

There were 3 major tops in 2011:

• 1344.07 on 18 February 2011
• 1370.58 on 2 May 2011, high of 2011, the blue horizontal line on the chart
• 1356.48 on 7 July 2011

These were intraday highs. The highest 2011 close was 1363.61 on 29 April (the Friday before Monday 2 May). Last Friday SPX closed at 1361.23 = 2.38 points (0.15%) short.

With SPX above 1360 now, the two lower 2011 tops were already surpassed and the absolute intraday high of 1370 is very close (less than 1% in SPX and easy to be reached on any day).

We have now seen two months of virtually uninterrupted up move in the SPX (the last bigger correction was in mid December). The uptrend in SPX is now in a danger zone, where the probability of a bigger downside correction is high .

S/R Levels are Actually S/R Zones

Keep in mind that support and resistance levels are zones rather than exact price points, especially those seen on longer time frames. It is perfectly possible for the SPX to break through 1370 to the upside and continue higher for a few percent before reversing (this is quite common on the SPX). It is also perfectly possible for the reversal to occur before the exact 1370.58 price is reached. Not least, it is also perfectly possible for the SPX to continue higher without a bigger correction, although some resistance or sideways action in the 1360-1380 area is very likely.

How the Resistance Looks on the Other Indexes

Dow Jones Industrial Average

The high of 2011 (12876) was already tested on the Dow. On Friday the index closed 74 points higher. Any continued up move will certainly require the highs being breached on S&P500 too.

NASDAQ Composite

NASDAQ Composite looks most bullish of the three closely related major US indexes. Like on the Dow, 2011 highs have already been breached and the index closed at 2951.78 on Friday, 2.2% higher than the maximum of 2887.75 from May 2011. Furthermore, these highs also exceed those from 2007 and we are now seeing the highest levels on NASDAQ since early 2001 .

What It All Means

So will stocks go down now or will they keep going up? Noone knows. There are good fundamental reasons for either. Well leave the predicitons to the analysts. In any case, watch the SPX 1360-1370 level closely.

There may be some continued sideways action (like we have seen on Friday already). There may be sharp short-term reversals, false breakouts, and corrections. A resistance level of this significance rarely stays unnoticed even by a smoothly rallying market (remember gold at 1000?).  When it does, thats very bullish.