For the past 11 trading sessions, the S&P 500 has closed in a tight trading range between 2470 and 2478.
Oh, sure, we’ve seen intraday moves slightly above and below that range. But on a closing basis, the most widely followed stock market index in the world has moved less than 0.3% for more than two weeks.
This action – or lack of action – has worked off all of the overbought and/or oversold conditions on the various technical indicators. And it’s allowed the index to build up energy for its next big move.
So, for today, I thought we’d take a few moments and try to figure out what is most likely to be the direction and the size of that next move.
Here’s an updated look at the daily chart of the S&P 500…
The first thing to notice here is the S&P is trading above both its 50-day moving average and its 9-day exponential moving average. And the 9-day EMA is trading above the 50-day MA.
This is a bullish configuration. The price action is strong, and it will remain that way until the S&P closes below its 9-day EMA (2472-ish). So, for the moment, the path of least resistance is higher.
Notice also that the index bounced 65 points off of its April low before retesting its 50-day MA. It bounced 70 points off of its May low. If we get something similar this time around, then the S&P should bounce about 70 points off of its July low of 2415 – which gives us an upside target of 2485 or so for the current uptrend before the index comes back down to retest the 50-day MA, or chops around long enough to give the 50-day MA time to catch up to the current price.
In other words, the momentum favors the bulls but the upside is somewhat limited from here.
Now let’s take a look at an intraday chart and see if by shortening the time frame we can get a more recognizable and tradable pattern. Here’s the 60-minute chart of the S&P 500…
This chart chows a very symmetrical head-and-shoulders pattern – where the shoulders are similar in both time and price.
A head-and-shoulders pattern is a bearish setup that often indicates the end of an uptrend and the start of a downtrend. Since this is a 60-minute chart, if the pattern plays out, it should do so within just a few days.
This pattern is only valid if the S&P comes back down and breaks the neckline of the pattern – the first solid blue line on the chart – by trading below 2465 before it rallies decisively above the top of the head (about 2485).
We can calculate the projected target for a downside move by taking the distance between the head (2485-ish) and the neckline (2465) and then subtracting that result from the neckline.
The distance between the head and the neckline is 20 points. If we subtract that from the neckline (2465), we get a target of 2445.
Funny how that target lines up pretty well with the 50-day MA line on the daily chart.
So there you have it. If the bulls win the current tug o’ war with the S&P 500, then there’s probably 10 points or so of upside potential.
On the downside, if the bears win, then we could get a 30-point drop from here.
Best regards and good trading,
P.S. I always like to hear what my readers think about the current state of the market. Send me your thoughts, along with any other questions or concerns, right here.