S&P 500 Chart – Long Term View

I’m posting a longer term chart of the S&P 500 Index ($SPX.X) as of Friday, September 18, 2009 after the markets closed.  The S&P 500 finished the week at 1,068.30.  This chart uses monthly data which smoothes out some of the very short term ebbs and flows within the index.

The chart covers the past 15 years and a couple of months and is marked up to highlight the moving averages more than the single trend line I drew.  The trend line starts at the lows of 15 years ago and goes through the bear market low of 768 in 2002 and finishes pretty close to Friday’s closing level, give or take a few points for my less than precise drawing skills.  It might not matter, but the coincidence was worth noting, especially since it acted as resistance for the intra-month top in November 2008. 

The 20 and 100 month moving averages do seem to have a stronger historical significance though.  I circled most of the areas where the index used one of the moving averages as support or resistance.  Each time wasn’t an exact turning point, but many times they have acted as an important indicator of a turning point coming soon.  This visit with the 20 month moving average marks the first meeting with the index in nearly a year and a half.  The last time the SPX was away from its 20 month moving average for a significant period of time ended in 2003 where it only paused before racing up to the 100 month moving average before finding resistance.  After the 20 month moving average broke resistance, the same line then became support for the index.

Also worth noticing are the areas I circled in red and green.  These highlight the breaks in the Williams %R indicator below overbought (red) and above oversold (green).  Each time the Williams %R changed direction (except for 1998 when the 28 month indicator didn’t make it far before reversing course) the rally or decline continued for years to come.  Fascinating to note further, the area I mentioned in the last paragraph when the 20 month moving average broke resistance mirrors the current set-up with the Williams %R break higher coming just a few months ahead of it.

What does all this mean?  I’ve painted both sides of the picture for bulls and bears so far and now I need to pick a side.  I expect a short term pause for the SPX to move sideways if not down before the rally continues too much higher.  I want to see if the trend line and 20 month moving average hold any power before I think it’s a good time to get in now.  If those lines break resistance, the bull hat will feel much more comfortable.  From the current range, SPX could move up to 7% higher before hitting its 100 month moving average. That’s the point where I’ll start getting more worried about this rally.  I’m a big believer in Williams %R as a technical indicator and it’s still saying the rally has legs, so who am I to argue?  I’d just feel more comfortable if we had a step back before taking yet another step forward.  The rally that started in 2003 had six months of gains, one down month and then another five months up.  A down month soon should be shallow, just enough to let those who haven’t been invested enough during this rally to get in finally.

From the mentality on the street and the reality that the economy is starting to show improvements in some areas, I expect any dip to be shallow and bought before it gets out of hand.