To taper or not to taper? That is the fork in the path but maybe the divergence in outcomes is smaller than expected – a pothole rather than a cliff. The S&P 500 is a more accurate measure of the U.S. market after three components of the Dow index changed this week. The weekly chart of the S&P 500 index shows a particularly strong and established trend with a number of important features.
First we look at trend strength. This is shown with the Guppy Multiple Moving Average (GMMA) indicator on the weekly chart. The long-term GMMA group of averages (shown in red) is well separated, which shows that investors are confident. When the index retreats investors enter the market as active buyers.
The short-term GMMA group of averages (shown in blue) is also well separated. When the S&P index moves to touch the wooer edge of the short-term GMMA it has been a buying opportunity to enter the market at a point of temporary weakness.
The new section of the uptrend that began in January 2013 has created a stable separation between the two groups of moving averages. This combination of features is usually associated with exceptionally stable uptrends that continue for many months.
Resistance has developed near 1700 but this has not shown any end-of-trend behavior. The GMMA analysis suggests a strong and continuing uptrend. Different methods are used to set the next upside target for the S&P index.
Second we look at the character of this uptrend, which is used to set the upside targets. Starting from the lows near 1120 in October 2011 the S&P 500 has moved in well-defined trading bands, each of which is around 140 index points wide. The width of the band is projected upwards to create new upside targets.
The trend behavior has been to breakout above the upper edge of the band and then rally quickly to the next target level. This is followed by a retreat and a retest of the upper edge of the trading band before a new breakout develops.
This is seen with the breakout above 1560 in April 2013. The index moved quickly to the trade band projection target near 1700. A retreat developed and tested the 1560 level as support in June 2013. The rebound from support is currently retesting resistance near 1700.
If the pattern of trading band breakout continues there is a high probability the S&P will breakout above 1700 and quickly move to the next upside target near 1840. This is a consistently bullish behavior that gives investors confidence to buy when the S&P dips towards support or the upper edge of 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.