The story of the week was the new high in the S&P 500 Index (SPX). The comeback of the SPX was remarkably fast, though this isn’t unusual given the historical tendency for the “megaphone” chart pattern visible in the index to bounce back quickly. Last week we looked at a similar megaphone pattern in the SPX from the year 2005 and saw how quick and violent was the upside turnaround from this pattern (see chart below).
A similar pattern is playing out this time around with the S&P retracing all of its losses from the past six weeks and culminating in a token new high. As I wrote in the July 3 report regarding the S&P: “A conservative drawing of the pattern’s upper and lower boundaries yields a 60-70 point upside target to roughly the 1,680-1,690 area, i.e. commensurate with the previous peak in May.
A more liberal rendering of the pattern’s boundaries (as I’ve drawn here), would give us an estimated upside target of around 1,720 – admittedly extreme but not completely out of the question.” Already the 1,680 minimum upside objective has been reached. [Excerpted from the 7/12/13 issue of Momentum Strategies Report]