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Why 1345-1370 on the S&P 500 Is Likely to Fail as Resistance

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A simple rule of technical analysis states that the more a level gets tested, the weaker it gets -- and hence it ultimately gets broken.

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The area between 1345 and 1370 on the S&P 500 served as resistance three times in 2011. After the latest rally that started in December 2011, here we are again right in the middle of this zone.

In 2011 the 1345-1370 area had formed a nice head-and-shoulders pattern that in early August hit its ultimate target around 1150.



After chopping around for two months the index finally found a tradable bottom on October 4 at 1075. Stocks then proceeded to rally a quick 20% and paused at the 1280 area in late October. From there the S&P 500 built an inverse head-and-shoulders pattern that ultimately broke out in late December and led to the 8% rally the index has seen thus far. The textbook target for this inverse head-and-shoulders pattern is 1360, which we reached last Friday, January 17.

And so here we are right in the middle of the 1345-1370 range and right at the target level of this latest inverse head-and-shoulders level.



Another important reason why the 1360 level plus/minus 10 points has acted as good resistance is because it is the exact 76.4% Fibonacci retracement level of the move from the late 2007 highs to the early 2009 highs.



A simple rule of technical analysis states that the more a level gets tested the weaker it gets and hence that it ultimately gets broken. I believe such will ultimately be the case and the S&P 500 will move toward and possibly above the 1400 area at some point in 2012.

However, given the steep ascent stocks have made over the past two months (all without any meaningful pullbacks in price) a price correction first is needed. A correction of anywhere from 3% to 6% would take the S&P 500 somewhere between 1280 and 1330. From there the index will have a better chance at hurdling itself above the 1360 area and stay there, at least for a while.



So there you have it: 1360 is likely to ultimately fail as resistance, and a pullback of a few percentage points beforehand would make that break all the stronger.

Editor's Note: Read more at The Steady Trader.
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No positions in stocks mentioned.

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