Charting Asia

Charts: Fear not, the S&P's uptrend will continue

Traders work on the floor of the New York Stock Exchange, Jan. 8, 2015.
Brendan McDermid | Reuters

Analysts are worried that the S&P 500 will collapse following the index's 14.5 percent rise in 2014, but chart patterns suggest otherwise.

Despite last year's double-digit percentage rise, analysts are cautious on their outlook for the S&P 500 in 2015. Most analysts predict slim, single-digit percentage gains, with a handful questioning whether the index can sustain its upward momentum. However, chart patterns indicate that the uptrend remains solid.

The S&P has established a step and stairway pattern, which is defined by trading bands. The market breaks above the resistance level and moves steadily towards the second resistance level calculated by the height of the trading band. The market consolidates near the second resistance level and then retreats. The retreat may use the lower level in the trading band as a support level. The rebound from this lower support level moves above the top of the trading band resistance level. The process of breakout, consolidation, retreat and rebound breakout is repeated, creating a step and stairway trend pattern. This pattern has been in place with the S&P index since October, 2011.

This is a strong trend pattern with each upthrust target defined by the width of the trading bands. The market recently broke through the consolidation around 2000; the trading band calculation provides a target near 2150.

The S&P index shows it takes between 5 and 7 months for the index to reach and then breakout above the top of each trading band. This suggests the S&P can move above 2150 around March or April.

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A breakout above 2150 has a target near 2300. Using the same time method, this suggests 2300 can be achieved around September.

This is a very steady and well-supported uptrend. The long-term group of averages in the Guppy Multiple Moving Average (GMMA) indicator have remained consistently separated since 2012 November. When the S&P retreated in October 2014 the long-term GMMA did not develop any compression. This confirmed the uptrend's exceptional strength.

The S&P 500 is not showing any pattern development that indicates a major correction or change in the trend, so the uptrend has a high probability of continuing in the first half of 2015.

There are three significant patterns that indicate a major trend change, best seen on a weekly chart where each candle represents a week of trading activity: (1) the head and shoulder pattern; (2) the rounding top pattern; (3) a blow-off top pattern follows a period of extreme upwards momentum.

None those trend reversal patterns currently appear on the S&P chart, which suggests the probability of a change in the trend direction in the first half of 2015 is low.

Daryl Guppy is a trader and author of Trend Trading, The 36 Strategies of the Chinese for Financial Traders – 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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