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S&P 500® Index Technical Picture

02/02/2012

The first month of 2012 traced out a solid foundation as the S&P 500 Index rose from 1257.60 to 1312.41 – a gain of 4.35%. Other indices that rose were the Nasdaq at 8.01%, Russell 2000 Index at 7%, and the Dow at 3.4%. Much of the gain was repricing higher the outlook for Europe as government auctions went well and manufacturing data strengthened.   
 
Within the S&P 500 Index, last year’s laggards turned into this year’s leaders as financials, materials and industrials led the charge. Yes, the breadth of the rally is narrow, and volumes are light. I also view the earnings season to date as a yawn, especially removing Apple. But, in the past few days, the price action has provided a nice technical formation with which Investors could assume more risk and easily calculate at what price they are wrong.
 
Let’s take a look . . .
 
Figure 1.1 below depicts two modest January corrections. One on January 13 and one on January 30. Both are shallow in nature and fleeting in time. I suggest investors seeking to assume more risk use January 13th’s 1277.58 as the level that protects the validity of this year’s rally.
 
•   Should the S&P 500 Index elevate above January 26th’s high of 1333.47 on a closing basis, the risk level should be raised from 1277.58 to January 30th’s 1300.49 low. (Figure 1.2).
 
•   Pulling back into 2011 (Figure 1.3), a series of higher lows have been traced through the fall. The further the SPX pulls away, both in terms of price and time, the more favorable the potential upside appreciation is:

o   October 4 low at 1074.77
o   November 25 low at 1158.66
o   December 19 low at 1202.37

 
•   The upside target for further appreciation is the May to late July series of lower highs (Figure 1.4). The market is currently positioned to make that challenge.


o   May 2 high for 2011, at 1370.58
o   July 7 high at 1356.48
o   July 21 high at 1347.00

 
A very interesting dynamic is developing by which underneath the market supportive higher lows from the fall are positioning the market to challenge a series of lower highs from last summer. I expect the outcome will be one of two conditions:
 
1. The upside is defeated, in which case a new higher trading range unfolds with the potential to elevate 2012 into a very strong performance that rivals 2009.
 
2.  A failure to break above last summer’s highs, which would send the SPX into a corrective mode that would be more a duration event, waffling at lower levels for an extended period of time, rather than a price event marked by a price free fall.
 
 
Figure 1.1, SPX, Two Modest January 2012 Corrections

Source: Bloomberg
 
Figure 1.2,  SPX High, January 26, 2012

Source: Bloomberg
 
Figure 1.3 SPX Series of Higher Lows, Fall 2011

Source: Bloomberg
 
Figure 1.4 SPX May to Late July 2011 Series of Lower Highs

Source: Bloomberg

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