Why more upside is in store for the S&P 500

Traders work on the floor of the New York Stock Exchange in New York.
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Traders work on the floor of the New York Stock Exchange in New York.

Investors are beginning to question whether the S&P 500 can sustain its upward momentum amid worries that the rally in U.S. stocks may be testing its limits coupled with unease over geopolitical tension between Russia and the West, but chart analysis suggests that no trend change is imminent.

The S&P weekly chart shows a well-established habit of behavior. Starting with the uptrend development in September, 2010 the S&P 500 has consistently moved up in a series of trading bands.

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This continues to be a strong uptrend with each upthrust target defined by the width of the trading bands. The market broke above the top of the consolidation band around 1850 and the trading band calculation set a target near 1990. This target level was achieved and is followed by the S&P 500's typical habitual behavior. Each time the upper edge of a trading band its reached the S&P 500 retreats to the upper edge of the long-term Guppy Multiple Moving Average (GMMA). And then the S&P 500 develops a strong rebound rally that moves above the upper edge of the trading band.

When the S&P 500 was near 1700 many analysts said the market would fall. Instead the index developed a rally breakout and moved to the next projected target near 1850. Again, at this level, many analysts said the market would fall but the index rallied above this level and went on to reach the next projected target. This is the habit with the S&P 500 index.

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The key factor to look for is the consistent strength of the long-term GMMA. This is shown by the steady degree of separation. When the market does develop a dip it uses the long-term GMMA as a support level. The dips in June and October of 2013 and February 2014 all touched the top of the long-term GMMA before developing a new rally and breakout above resistance. The long-term GMMA did not show any signs of compression.

There is a high probability the same behavior will repeat in the current situation. This means the S&P 500 could dip to 1890 or lower before developing a rebound. The lower edge of the trading band is near 1850, which also provides good support. A retreat to these levels is a buying opportunity for a continuation of the uptrend. We will apply the ANTS trading method to capture the rally.

The key feature to watch is the reaction of the long-term GMMA. If compression occurs then this suggests the uptrend is weakening. If the long-term GMMA remains well-separated then it confirms the uptrend is strong and will continue.

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The trading band projection methods are used to set new targets above 1990. The longer-term upside target is near 2150.

Very rapid market collapses can develop but these are usually preceded by clear chart signals with broad index chart patterns. The S&P 500 is not showing any pattern development which indicates a major correction or change in the trend.

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.