With stocks up big year to date and most indices at or already somewhat above critical levels, it’s time once again to review the charts of the broadly followed S&P 500 for potential clues to the near-term blues.

As of Friday’s close, the S&P 500 was higher by 9.43% and only about 5 points away from the index’s all time closing-high of 1565 and 15 points away from its all-time intra-day high at 1575.  As such, arguably the all-time highs have now been re-tested.  Question is, now what?

If we pull a weekly chart of the S&P 500 back to the late 1990s, we note that with last week’s rally the index actually completed a triple-top, or at least so the myth goes.  After trading and following markets for close to 1.5 decades I can tell you that such ‘triple-tops’ rarely exist, and when they do its only a matter of time until the resistance level finally gets driven through.  In other words, while some consolidation may soon be in order at current stage in the rally, eventually the 1575 level on the S&P 500 will give way to higher levels and the so called triple-top will again not stand.

On a multi-asset chart below I overlaid the S&P 500 with the ishares Dow Jones Industrial Average Index Fund (IYT) as well as the KBW Bank Index (BKX).  What we are seeing is that all three indices are currently extended both in terms of percentage appreciation, slope, and duration of a rally without any meaningful ‘correction’ in price.  Healthy markets consolidate and correct, and at the moment U.S. equity markets are lacking such action.  Since 2010 there have been numerous rallies, each lasting 3-4 months and resulting in price increases of around 15%.  Since November 2012 the S&P 500 has rallied a little over 15% in four months, thus at least compared to markets since 2010 is overextended.

Bottom line: Don’t just blindly buy a potential breakout attempt by the S&P 500 past the  all-time highs.  The prudent course of action at these crucial and lofty levels in the index is to remain patient and expect choppiness as everyone is watching this level.  Chances are very high that ultimately this third try at the are around 1570 will succeed and the market will  break higher.

In the meantime, once stocks are ready to pause some before moving higher again, how far could the S&P 500 correct you ask?

In my work I prefer to set simple reference areas as opposed to exact points due to the fact that technical analysis in my humble opinion is more of an an art than a science.  Two areas of support I am watching: 1) The February lows near 1485 and 2) The late December 2012 lows near 1400.

 

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