S&P 500's 'triangle pattern' points to more gains

Traders work on the floor of the New York Stock Exchange.
Brendan McDermid | Reuters
Traders work on the floor of the New York Stock Exchange.

The S&P 500 is bucking against its all-time high, and JP Morgan analysts say a bullish chart pattern and still-easy Fed increase the odds the rally will continue in the weeks ahead.

They say that after two months of "coiling" below the 2,120 February all-time high, the S&P is trying to break out, and a bullish triangle consolidation pattern repeatedly held key support at the 2,040 March 11 low and at 2,034, a key 61.8 percent Fibonacci retracement level widely followed by chart analysts.

That puts 2,200 in sight. "The Feb-Apr triangle pattern breakout has a 2191 objective," they wrote.

But later in the year, the rally could fade.

"We continue to think a correction will coincide with a Fed tightening, which is currently priced in the fourth quarter," wrote technical analysts Jason Hunter and Silvia Seceleanu.

"Bigger picture, the longer-term rally continues to lose upside momentum and is trading in a wedge pattern that stretches back to 3Q14. That combination and the maturing Elliott wave count that defines this leg of the bull market favor an eventual period of consolidation," they note.

The S&P 500 touched 2,120 Thursday, its all-time intraday high and it was just that Friday afternoon. "Next resistance is 2150-2180. The 2040 support zone is still critical for the medium-term outlook," they wrote, adding market sentiment remains subdued. The next resistance is at 2,149.

The analysts say they are watching the two-year note for clues on Fed action. It was trading with a yield of 0.51 percent Friday.

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"For now 2-year notes trade in the lower-half of the year long range and Euro/dollar curve does the same. We will continue to monitor those markets as a barometer for Fed policy and adjust our forecasted equity trajectory accordingly. The brief period in early March when equities and Treasury yields broke their typical correlation was a preview of what we expect that transition to look like," they wrote.