S&P Support Levels, Possible Dollar Rally Ahead

I’ve been inactive over the weekend but I want to talk about the possibility of new and higher support levels in the S&P 500 and also a possible short term SHS rally for the Dollar Index much like the previous two that took place this past year. So let’s get right into it.

Here’s our 9 month chart of the S&P with a few basic technical indicators. The next closest resistance is at the 1174 level and the next closest support would appear to be at the 1090 or by a bearish outlook, 1040.

In the chart below I’ve added the 1113 and the 1123 as the possible range for the new support level that may develop over the next two to three weeks.

Part of the reason why I think we’ll stay in this higher range is because a lot has changed since the previous rally that we had earlier this year before the Greece Debt Crisis. There is a lot more money in the system and the QE has stocks melting up to new permanent higher highs and higher lows. As I said, I think that the new support will come around the 1123 level which was the old resistance, or perhaps it may get as low as 1113 which was where our last gap that needs to be filled is at.

If you take a look at the stochastics, you can see where we were previously overbought and two of those levels are at the 1123 and 1113. In addition, both pullbacks on the stochastics reach into roughly the 50% range and a full pullback to the 25% mark would bring us roughly to the 1113 level. Another indicator is the current 50 Day EMA is just below the former resistance of 1123. To have a 50 Day MA based correction now would bring us right into that range.

Now lets take a look at why I think we will have a pullback into that range.

I think that it is likely that we don’t yet get past the 1174 on the S&P 500. The dollar index is rallying today and is very close to breaking back above the previous support of 77.50 which I recently predicted would snap. If the dollar can close above 77.50 and stay above that for the rest the week, there is a possibility that we could see a mini shoulder head shoulder pattern form in the next three weeks that could translate into a very tender buying opportunity before the next Fed statement on Nov 3rd. The technicals have been oversold for weeks and the %K has now passed the %D as the stochastics are beginning to curve upward.

I believe this translates to and fortifies the analysis above regarding the market that may be about to find and test new support levels while the dollar temporarily corrects upward. If I am correct, then the dollar may come close to the 80.00 range which is where the 50 Day MA seems to be headed. The tail end of that rally would come after the Fed announcement which would depend that more inflation is expected to be pursued by the Fed. If that happen expect 77.00, then 76.60, then perhaps even 74.17 on the USDX.

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About Aaron Basile
Market Technician, Equity/Commodity Trader, Austrian Economist, Contrarian Investor

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