What is next for the S&P 500?? Now that the S&P 500 closed out 2015 with an annual loss, you are bound to hear all kinds of dire predictions about the market’s fate for 2016 and beyond. My focus is not weather the dire predictions are true or false. My focus is on the explanation and a visual representation of where some of the predictions may come from. The S&P 500 closed the year down 0.7% at 2043.94. But I can almost guarantee that someone will call for a drop to the 1800 level. Could it happen? Sure. Anything is possible. The chart in this idea should show you why.
Let’s take a look at this weekly chart of the S&P 500. The first thing you should notice is this chart has two uptrend lines. I have labeled them UT 1 and UT 2. UT 1 is an uptrend line that starts back in 2009. UT 2 is a steeper uptrend line. I drew this uptrend line on the chart so you can see that the S&P 500 began going up quicker in the second half of 2011. It continued at this new pace through the first half of 2015. But that is when the big picture changed. Take a look at UT 2, in mid August is when the S&P 500 crossed below UT 2. Just as interesting is that the S&P 500 has stayed below UT 2 since then. Since the candles are no longer following the uptrend line, UT 2, many wonder if they are following a downtrend line. I have drawn a red downtrend line at the top of the candles. It seems the candles are following DT 1 for the time being. And since the S&P 500 is below UT 2, one might consider the possibilities that it could come back to UT 1. Hence the 1800 estimate you may read about in the coming days & weeks.
Now that we have established how low the S&P 500 might go, let's talk about a couple more possibilities. What if the S&P 500 goes sideways for some time? Actually, it has been going sideways if you look at the chart the right way. Since mid 2014, the S&P 500 has closed above 1920 ish but below 2125 ish every single week except 3. So it is pretty safe to say the S&P 500 is going sideways, albeit in a fairly large range. If you see this sideways action continuing, a great investing strategy will be to go long in the low 1900's and sell (or get short) around 2100.
What if the S&P 500 gets above the red downtrend line, DT 1, and then sets a new closing high above say 2135? Well some will say the S&P is going higher. How much higher? I surely couldn't tell you. But at that point, I would agree with them and I would get long (if I wasn't already).
So let's recap real quick.
1- You might hear that the S&P is going down to 1800. And it might because that is essentially where UT 1 will be in the near future. If the candles stay below DT 1, it may be time to be short.
2- The S&P has been going sideways for a year of so. You can try to initiate longs when it is in the low 1900's and initiate shorts around 2100.
This will continue to work as long as the market continues going sideways.
3- When the market closes above 2125 (top of the sideways channel) you can start looking for a close at or above 2135. These new highs could be an indication that the market is headed higher. It may be time to get long at that point.
Thanks for reading!
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