The S&P 500 is admirably up over 10% since the 6/4 price lows. Since then prices peaked at 1426 and have closed as high as 1417.
Now around 1410, how much higher will this market go and can it close above 1420?
July Short-Term Sell Signal
The chart below from 7/18 shows a channeling technique utilized by the ETF Profit Strategy Update which helped identify an upcoming short-term selloff.
Two days later on 7/20, prices fell below the lower channel pointing to a trend change and giving comfort in a near term top.
In the August 2012 Newsletter's Short-Term Market Meter published on 7/20, we included the following update for our subscribers:
Soon after prices continued to fall, from 1365 on 7/20 to a bottom of 1330 on 7/24.
In addition to looking for a short term top, we also identified the 1390 zone as resistance that could eventually come into play. If 1390 were to fail as resistance then 1410-1420 would be the upside target.
Why were the Upside Targets Chosen and What Does 1390 Have to Do With It?
The 1410 and 1420 prices are the previous highs from both April and May and also the highest price since early 2008, last occurring before the worst part of 2008's selloff.
1390 was the price where a trendline from those highs was coming into play and providing resistance.
Continuing to track the market's choppiness, the 8/1 ETF Profit Strategy Update stated, "Price was rejected last week at 1390 by the green resistance trendline which connects the tops from April and May and should be watched. This keeps the ball in the bear's court. A breakout above this trendline would trigger a buy signal with prices seeking 1390 and then the double top area of 1410-1420". Below is the chart that accompanied that update:
A few days later on 8/6, 1390 failed as resistance and pointed to 1410 & 1420 as targets. Eventually on 8/21 Prices went as high as 1426 but immediately sold off to close below 1420 at 1412. The 1410-1420 target was met.
Why Can't Price Close Above 1420?
In technical analysis previous peaks and troughs often act as important resistances and supports as investors and traders who were previously underwater on their trades get back to even and close their postions, happy to just breakeven.
In this case investors who bought the S&P (SNP:^GSPC) at 1420 in April were losing money for over three months as price stayed below 1420. Investor psychology comes into play, but often after a long losing streak like the last 3 months, investors will sell when they get back to breakeven. Once 1420 was hit again, SPY $142 (NYSEARCA:SPY), sellers jumped in forcing prices down.
From a shorts perspective, investors who were selling at 1420 in April likely had their stop losses placed just above 1420 and likely the reason price went as high as 1426 on 8/21 before closing well below that. Those buy to cover stops got taken out on 8/21 leaving only the break even sellers and thus forcing prices down and rejecting price at 1420. ETFs that can be used to short the S&P are the SH (NYSEARCA:SH) and the SPXU (NYSEARCA:SPXU).
1420 remains key resistance and a major battleground between bulls and bears. The equivalent price on the Dow Jones Industrial Average (DJI:^DJI) is $13,300 along with its ETF (NYSEARCA:DIA) at $133.
The ETF Profit Strategy Newsletter, uses technical and sentiment analysis to stay ahead of market trends. We continue to watch the battle between 1410 and 1420 on the S&P to see if the bulls will be able to move prices beyond the major resistance and previous highs at 1420.