Many investors argue that the US S&P500 is the most important index in the world to follow. The Dow Jones Composite Index (DOW) is important, but it only contains the biggest 30 companies.
In comparison, as you can probably guess, the US S&P500 tracks the largest 500 US companies by market capitalisation. As such, many consider it to be the definition of the US stock market.
You may be thinking, ‘It’s good to know that the USS&P is important to follow, but I invest in Australian stocks, so how is this relevant to me?’
If you’ve ever heard the expression, ‘When the US sneezes, the world catches a cold,’ then you’ll know that whatever happens in the US markets usually has a knock-on effect worldwide. This is exactly what happened during the financial meltdown of 2008/09.
The bottom line is: The US is the largest economy in the world. If it slips, it’s likely that Australia will follow its falling path.
With this in mind, let’s look at the technical analysis of the USS&P 500.
The above chart shows a number of support and resistance lines.
The most important is the short term resistance level at 1,900 (green line at the top of the chart).
Since the beginning of the year, the market has tried to break through this important resistance level multiple times. The market needs to break out of the 1,900 resistance level to confirm the next phase of the bull market.
If the S&P500 breaks 1,900, this also means that it’s setting new all-time highs — punters are rightly nervous about investing in blue sky territory. Not to mention, fundamental analysis suggests that valuations are historically on the higher side.
If the market fails to breakout of 1,900, the short term support level of 1,840 (red line) seems likely to be in play for a little longer. If the market doesn’t like this level anymore, it could possible fall to a short term support level of 1,740.
Although looking unlikely at present, 1,740 could become the future short term support level if the market consistently fails to breakthrough 1,900. This could happen if there’s roughly a 10% correction later this year.
The blue line indicates the 2007 bull market high. This level was taken out early last year after a couple of months of resistance. I expect if the stock market declines significantly, this could become an important future support level.
Another positive indicator I’m watching is the 15 day moving average (pink dotted line). Technical analysis shows that there have been no periods of moving average consolidation since the beginning of 2013. This is remarkable.
Previous periods of consolidation, indicated by the shaded boxes, have been frequent, dating back to 2007. As such, any future moving average consolidation could be a major indicator of a market trend change.
I’m still cautious of a ‘true’ technical breakout above 1,900 since a lot of money is sitting on the sidelines waiting for, at least, a 10% technical correction.
The last time the market experienced a decent correction was in August to October 2011 — the market fell by 21% during these months. The market hasn’t experienced more than a 10% correction since! This is making punters nervous.
The bottom line is, despite the nervous news headlines, it’s difficult to argue against the market’s bullish set-up. And the bullish momentum doesn’t look like slowing down any time soon.
Jason Stevenson+
Resources Analyst, Diggers and Drillers
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