S&P 500 Chart (SPX) – Converging Trend Lines

I charted the S&P 500 ($SPX) after the markets closed on Friday, December 18, 2009 when it closed at 1,102.47.

These next two (holiday shortened) weeks are going to be very interesting.  Aside from the chart and fundamentals, the markets have a tendency to move up in the final week of the year.  The chart shows that’s one of likely the possibilities, but it’s not a completely easy path higher.  I drew six trend lines with different beginning points which mark different trends of higher highs and higher lows and one lower high.  All support and resistance lines cannot hold for the next two weeks.  If all but the shortest trend line holds, SPX will end higher by December 31st, with a likely dip soon after as the SPX will be up against strong resistance again by then.

The most bearish line is the shortest and least tested.  It shows that the rally has slowed and could be ready to give in soon based on the last push higher ended short of the previous high.  Even though it’s a short line, it could be the hint of something big to come.  The charting software I used for this chart doesn’t show Williams %R as clearly, so I left it off, but it warrants watching since it recently broke below overbought.  Monday’s direction for %R should be a better indicator of which direction SPX could be heading.  If it pulls higher, the rally is still on.  If it heads lower, hold your breath and watch the trend lines.  I chose this chart type because it shows the trend lines convergence better than the other and that’s the story I’m watching closest today.

The bulls will point to the two long trend lines of higher lows.  Both have held support recently and have been in play for longer than any of the resistance lines I drew.  Those two bullish trend lines are close to the 50 day moving average (1,088.57) for SPX which has provided strong support for most of this rally.  The bounce after touching these lines on Friday shows they still have some fight in them.  If they continue to hold the only path available is higher.  That path doesn’t let us ride along for long though.  The shortest trend line I mentioned above could stop the rally at 1,113/1,114.  If that short line ends up being a misread, the SPX could run all of the way up to 1,125 before it hits the next line of resistance.  If that line breaks (much lower probability here) the SPX could rally as high as 1,140 before faltering.  A rally like that, at this time of the year, is completely possible, but before you buy in to the Santa mentality to quickly consider the trading channel that’s been working.  Sell on rallies and buy on dips.  We might have some time to catch a few S&P 500 points to the upside from here, but not much and the correction from there could take us lower than we are today. 

With more than a couple of the trend lines set to converge in the coming month this is probably a better time to think about taking some profits or at least hedging the downside by buying puts.  If the trend lines of higher lows break, the next expectation for support is the horizontal line I drew of previous highs and lows around 1,080-1,082 which could push the SPX below its 50 day moving average which raises different concerns I’ll go into when that happens.