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<\/p>\n\tFor the past 11 trading sessions, the S&P 500 has closed in a tight trading range between 2470 and 2478.<\/p>\n
\tOh, 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.<\/p>\n
\tThis 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.<\/p>\n
\tSo, 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.<\/p>\n
\tHere’s an updated look at the daily chart of the S&P 500…<\/p>\n
\t<\/p>\n
\tThe 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.<\/p>\n
\tThis 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.<\/p>\n
\tNotice 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.<\/p>\n
\tIn other words, the momentum favors the bulls but the upside is somewhat limited from here.<\/p>\n
\tNow 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…<\/p>\n
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\tThis chart chows a very symmetrical head-and-shoulders pattern – where the shoulders are similar in both time and price.<\/p>\n
\tA 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.<\/p>\n
\tThis 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).<\/p>\n
\tWe 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.<\/p>\n
\tThe distance between the head and the neckline is 20 points. If we subtract that from the neckline (2465), we get a target of 2445.<\/p>\n
\tFunny how that target lines up pretty well with the 50-day MA line on the daily chart.<\/p>\n
\tSo 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.<\/p>\n
\tOn the downside, if the bears win, then we could get a 30-point drop from here.<\/p>\n
\tBest regards and good trading,<\/p>\n
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