Why the S&P Rally Has Legs: Chartist

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Starting October 2012, the S&P 500 Index has developed a strong and stable uptrend. The uptrend is well defined using the Guppy Multiple Moving Average (GMMA) indicator. This indicator has two groups of averages.

The long term group captures the thinking of investors. Wide separation shows strong investor support for the trend. The short term group shows the thinking of traders. In the S&P index they are not quite as confident as investors.

The S&P shows rally and retreat behavior with the lower edge of the long term GMMA tested in June 2012 and again in November. For each test investors have come into the market as buyers because they believe the S&P can go higher. This is a bullish result and confirms the strength of the uptrend.

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The trend behavior does not include any chart patterns which help to set upside targets. However, the long term pattern of support and resistance shows the S&P index moves in wide trading bands.

Each of these bands is around 140 index points wide. The lowest of the support/resistance level is near 1130. The next support/resistance level is near 1270. The current support/resistance level is near 1410. The current rally is a rebound rally from this support/resistance level at 1410. The width of the trading bands provides the next upside target for this uptrend. It is near 1550.

The 1550 resistance level is important. This level was near the peak high of the S&P index in October 2007. It was also near the peak high in March 2000. This suggests 1550 is a very significant resistance level.

Traders will watch carefully for the development of any chart pattern which suggests a rapid retreat from 1550. Rapid retreats happened in 2000 and 2007. Traders will use caution as the index moves to test the 1550 resistance level.

A bullish result will develop if the S&P Index consolidates near the 1550 level. This consolidation could include a sideways movement and a retest of the long term GMMA group of averages. This consolidation indicates the market can continue moving upwards.

A very bullish result is a small consolidation near 1550 followed by a rapid breakout above this resistance level. This would confirm a very strong uptrend. The upside target for this type of breakout is near 1690. This target is calculated by projecting the width of the trading bands above 1550.

The S&P index uptrend is stable and well developed. There is a high probability this uptrend will continue to 1550. Investors will buy when the index retreats towards the long term GMMA.

Daryl Guppy is a trader and author of Trend Trading, The 36 Strategies of the Chinese for Financial Traders –www.guppytraders.com . He is a regular guest on CNBCAsia Squawk Box. He is a speaker at trading conferences in China, Asia, Australia and Europe.

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