Investment Contrarians

Will the S&P 500 Hit 1,525?

By for Investment Contrarians |

S&P 500 Hit 1,525Many analysts and investors have been hesitant about the rally in the S&P 500. While I wasn’t surprised with the rally into the Federal Reserve announcement, I thought it highly likely that the S&P 500 would have a pullback in the fall. However, it appears that the S&P 500 is continuing its strong move up and, at this point, it would be quite dangerous to bet against this rally and the Federal Reserve.

Since the S&P 500 broke the downtrend in June, it has formed a very clean and resilient uptrend. In technical analysis, trendlines are extremely important. We note that in April of this year, the S&P 500 broke a long-standing trendline that is extremely important in technical analysis. This led to a subsequent decline in the market.

Another important note is that the highs reached in May of this year were not in excess of the highs reached in April. In technical analysis, if the S&P 500 cannot overtake its previous high, it is seen as extremely bearish. We saw the net results leading to a low in the S&P 500 in early June.

S&P 500 Large Cap Index Chart

Chart courtesy of www.StockCharts.com

With this new uptrend developing, technical analysis will tell you to pay attention to whether or not the highs of the S&P 500 continually get broken. As is obvious by the chart, this is certainly the case. Another bullish sign is that the minor occurrence of the Relative Strength Index (RSI) being overbought in the middle of September has apparently been resolved.

In technical analysis, when the RSI becomes overbought, it does not mean that the S&P 500 will crash; it only means that there is a pause in the move. Sometimes the S&P 500 will decline, and sometimes it will remain in a trading range until enough momentum is regained, and the market continues the trend upwards. Price is the truth when it comes to technical analysis, while opinions are irrelevant.

S&P 500 Large Cap Chart

Chart courtesy of www.StockCharts.com

The weekly chart shows several interesting things when it comes to the technical analysis for the S&P 500. First note that the RSI is not overbought at all. This means there is potential for additional significant upside in the S&P 500. Next note the length of move from the bottom to the top of each rally. The first rally in the S&P 500 began with the low in June 2010 and topped out in May 2011, which consisted of approximately 360 points. The second rally began in August of 2011 and lasted roughly 300 points. With the current low set in June 2012, assuming this rally is shorter than the previous two, adding 250 points to that level brings you to approximately 1,525 in the S&P 500.

Obviously there are no certainties in life or in technical analysis. While I have been somewhat cautious with this rally, believing in the potential for a pullback during the fall, it appears that the S&P 500 might have some more room to run before a significant correction ensues. Naturally, any geopolitical events or financial calamity would disrupt the markets, which we would see in a break of the trend and a failure to reach new highs, all negative signs in technical analysis.

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