The S&P 500 is headed for a breakout

By Lawrence G. McMillan

The market had a powerful showing Tuesday with the Standard & Poor’s 500 Index rallying 1.6% for the day. Market indicators suggest a potential 100-point rise in the index over the next few months.

The stock market suffered some heavy selling in the first half of June, thereby creating some contrary buy signals that eventually took place in late June. Those signals have been called into question with the market decline thus far in July, but it appears that bearish concerns are overblown and are just the market’s way of luring bulls out of their positions before a strong upside breakout takes place.

I usually follow four major indicators, two of which are heavily oriented toward options and two of which are not. The first is merely the chart of the Standard & Poor’s 500 Index. It is the ultimate arbiter, in that price is always correct, no matter what other indicators might say.

There is some legitimate debate as to how one might interpret the S&P 500 chart: Is it in a wide trading range between 1,260 (the March and June lows) and 1,360 (the “Bin Laden” May highs), or is it bullish because there now is a higher low coming off the June lows, and the 20-day moving average is rising?

I favor the latter, but we’ll know for sure in a short while. If the S&P can exceed the 1,355 highs, then we’ll have a pattern of higher highs and higher lows, and that would activate targets in the 1,425 neighborhood or so. However, a close below Monday’s lows at 1,295 would negate that bullish picture.

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