Outlook for the Coming Week

We’re beginning the week this week at the top of a rising range in which the S&P 500 has traded for nearly the entire month of November. On Friday, we registered a breach to the upside, though it was quickly followed by a retrenchment, back down into the channel. The market, as yet, isn’t happy outside its recent comfort zone.

S&P 500, 3 minute bars

S&P 500, 3 minute bars

The big question for now is whether Friday was a harbinger of a re-acceleration in the pace of the uptrend, an upward inflection in the pace of gains, or if we simply continue in the vein of the November status-quo, still generally moving higher, but at a more modest pace. Each scenario has its own set of trading implications.¬†However, in either case, a significant potential obstacle looms, one that we’ve had little reason to pay attention to until now: major multi-year resistance looms overhead, currently around 2082.

Lets consider the latter case first. I’ve prepared an unusual 10 minute chart below just for this purpose, with recent trend lines projected out into the future for reference (caveat: these are only projections, not predictions, and are subject to revision at any time should market conditions warrant). The rising orange line on top of the chart is the significant multi-year resistance level I mentioned. Should we continue on the current track, we will be meeting it head on between December 5th and 22nd somewhere in the S&P 2090-2100 range.

So in the not too distant future, we will need to consider how we position if and when the market meets resistance and falls, or if we get a breakout. Should the former case above play out and we get an acceleration in the current trend, we could be facing major resistance much sooner. We’ll keep our eyes peeled.

S&P 500, 10 minute bars

S&P 500, 10 minute bars

Looking at the 3 day chart below, its clear that a test of this long term resistance doesn’t necessarily mean a major selloff is near at hand. Its entirely possible we move along higher, directly below it for some time, essentially moving parallel with the longer term trend for a time. That said, at least moderate weakness is inevitable eventually once we test a major resistance line for long enough without breaking out. Not an earth shattering crash, but weakness worth protecting against. In any scenario, the market will be flashing technical indications of a breakdown well in advance of any major downdraft.

S&P 500, 3 day bars

S&P 500, 3 day bars

However, should we get a breakout, there is a lot of room to run before reaching what I call secular, or very long term, resistance. The secular trend channel is represented by the white upward sloping lines on both the monthly and quarterly charts. Secular resistance currently falls around 2500, a very long way off; we haven’t tested this level since 2007. On the downside, secular support comes in around 1000. It would take a crash of epic proportions to test this level any time soon, but we tested it in 2009; crazier things have happened. Realistically, though, both these levels will be out of play for the foreseeable future. The secular range is just too big for these levels to be of any imminent value.

S&P 500, quarterly bars

S&P 500, quarterly bars

These levels can be violated, though. We saw just such an event during the tech bubble in the late 1990’s, culminating in the 2000 peak. By that point, we had move so far above secular resistance, even the 45 month moving average had moved well above it. I consider this event to be an aberration, though, not representative of the broader long term trend.

For now, though, we’ll stay focused on the levels near at hand. Range support and resistance of 2046/2069 and long term resistance at 2082. Good luck out there.

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