S&P 500 index will likely see a rip-your-face-off move this year. This is what the index’ weekly price chart is saying.
As can be seen from the chart below, S&P 500 has been trading in a very broad range of 330 points, and is currently at the higher end. Even though the expectations from quarterly corporate earnings are low, they haven’t proved as a deterrent to the S&P 500 which is aiming for a new lifetime high.
Additionally, slowdown in the Chinese market, recessionary pressures in oil-producing nations such as Russia, Venezuela and Brazil, and crash in the commodities sector have all failed to deter the bull. S&P 500 is trading at 2080.73 points, off less than 3 percent from its all-time high of 2134.71 points.
Since the index is still in the range, it would be unwise to call out a direction, however, we strongly believe that a breakout beyond this 1.5-year-old range will cause a big move. We cannot anticipate the exact timing of the breakout but we do not see the consolidation extending any further than 2016.
A breakout on the upside will result in an addition of 330 points to the current S&P 500 level, taking it to just north of 2400. However, a breach of the lower trendline which, as of now, comes in at 1770, would drag the index to a level of 1440. That would be a sharp 30% decline from now, essentially making it to the bear territory.
Why do we think a big move is imminent? Take a look at the 14-week RSI readings, attached below the price chart. It becomes evident that the strength reading has been declining since 30th June 2014 on a consistent basis, and has been registering lower lows even as price continues to rise. S&P was then trading at 1980 while the RSI was at 72.53. But now, the RSI is at 57.87 even as the price is roughly 5 percent higher.
This is a case of strong divergence and cannot last for long. Therefore, traders should be preparing for a big move in the index. A decisive break-out of the range will be the first indication, and market participants should latch onto it.