Projecting S&P Price Targets with a Breakout

Sep 12, 2008: 11:47 AM CST

I mentioned in yesterday’s post that the market is trapped in a defined range, and that a break out of the range will produce a likely sustained move.  A reader asked me to highlight potential targets if a break-out move occurred, so I want to take a quick look at S&P potential price targets should we break above the August highs or July lows.

First, let’s look at the S&P 500 consolidation on the daily chart and then rise to the weekly and monthly:

S&P 500 Daily:

Here we see the consolidation clearly as being between then August highs at 1,313 and the July lows at just above 1,200.  Let’s attempt to step into the future and see what resistance levels would present themselves should price break upwards, and what support levels would present themselves should price break downwards and not try to make a prediction about which way price will ultimately break – let’s just be ready when it does.

On the upside, 1,350 continues to be a significant level to overcome.  Here there are at least five major pivots at this level:

The Daily 200 Simple Moving average currently exactly at 1,350
The 61.8% Fibonacci (“Fib”) retracement from the Aug. high to the July low at 1,349
The Weekly 50 Exponential Moving Average at 1,350 currently
The 38.2% Fibonacci retracement of the October High to the July Low at 1,350
The 20 period Exponential Moving Average on the Monthly chart at 1,355 (and declining)

I have drawn red hash marks to represent the Fibonacci levels on these charts off key price pivots.

Should price break 1,350, then the next logical zone of supply (resistance) will come from the May price highs at 1,440. Also, this area corresponds with the 61.8% Fibonacci retracement of the October 2007 high to the July 2008 low – a major pivot to watch.  There is only one other major chart point to watch at this level, which is the horizontal trendline (not drawn) at 1,425 which served as significant support in the past and resistance recently.

S&P 500 Weekly:

The Weekly chart shows the larger scale Fibonacci retracement (red hash marks) which should be observed carefully, and the 50 week EMA corresponds with the 38.2% retracement of the entire move (green arrow).

Also, again the May market high near 1,440 corresponds with the 61.8% Fibonacci retracement of the major market move.  It would be absolutely remarkable for buyers to push price beyond this level, so until we get indications that they might, I will offer no further upside projection targets.

Now, let’s look at the downside….

S&P 500 Monthly:

The first line of defense for the buyers – and zone of support – would come in at the 50% Fibonacci retracement of the major bull market move that began with the market bottom in 2002 to the October price high in 2007.  The 50% Fibonacci retracement rests at 1,171, which was almost tested in July once price broke the 38.2% retrcement at 1,266.  Price is now beneath that key level, which is supremely significant to the long-term structure.  This also corresponds with prior support in 2005.

There are other methods, including Elliott Wave, Gann, and Fibonacci price projections which I could use, but I want to keep this discussion simple and focus on key, highly watched areas.  The projections using these methods all project price to the downside because that is the direction of the primary trend and path of least resistance – in other words, there are far more zones of supply (resistance) than there are support zones.

The old adage goes, “In a Bear Market, there is no support.”  Be aware of this.

Summary:

In summary, I project two targets to the upside if there is indeed a breakout up:

1,350 would be initial, significant resistance
1,440 would be secondary, significant resistance

If a breakout down occurs:

1,171 would be initial support
1,075 would be secondary support (via the 61.8% large scale retracement)

Keep a close eye on the big picture and major conflunces of price levels as we near them in either direction.

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