S&P 500 Pop Above 1,700 Explained

Guess what! The S&P 500 now trades above 1,700.

Should I dare ask, why did the S&P 500 (NYSEArca: SPY) pop above 1,700? As every Grandma and kindergarten kid will tell you, it’s because of what Bernanke said on Wednesday post FOMC address.

This may well be, there’s no denying that the Fed has fueled the stock market, but there’s another – possibly even better – explanation for the pop.

The S&P 500 chart below was initially published in the Wednesday edition of the Profit Radar Report and reveals something not commonly addressed by the mainstream media.

No, it’s not the fact that stocks didn’t pop the trading day after Bernanke’s speech. The chart shows that price action was contained by two red trend lines that acted as resistance.

Why and how do trend lines work?

This may be a corny illustration, but resistance levels contain stocks like a fence contains a lion. If the fence is broken the lion dashes out. Like a freed lion, the S&P 500 (NYSEArca: IVV) dashed higher as soon as ‘the fence’ (double trend line) was broken.

This hourly chart evidences that short-term trend lines work quite well. Just because resistance was broken doesn’t mean a rally will continue indefinitely.

Quite often the S&P (NYSEArca: VOO) will come back down to test support (prior resistance) before moving higher or it will run into a new resistance level.

What’s the Next Target or Resistance?

To discover higher resistance levels, we need to zoom out and look at a daily or weekly chart.

The Profit Radar Report, a premier resource for S&P 500 technical analysis, has already identified the next strong resistance and target level for this rally.

It’s too early to tell for sure, but the upcoming resistance should be important as stocks run the risk of declining significantly once resistance is reached.

You may check out the Profit Radar Report or take a look at this free do-it-yourself paper on S&P 500 technical analysis.

Weekly ETF SPY: SPY ETF vs S&P 500 – Technical Analysis Variations

The S&P 500 Index triggered a beautiful ‘kiss good bye’ signal on Tuesday, before Bernanke spoke and sunk stocks. Interestingly, the sell signal for the S&P 500 could not be seen in the chart of the SPDR S&P 500 ETF (SPY).

SPY S&P 500 ETF or S&P 500 Index. What’s the difference? It’s like tomato or tomato (imagine the second ‘tomato’ spoken with a British accent).

I always try to base my analysis on the purest representation of any given index or asset class. When it comes to the S&P 500, the purest representation is the actual S&P 500 Index you always see quoted.

The SPDR S&P 500 ETF (SPY) tracks the S&P 500 very closely, but even minor variations can make a major difference.

For example: The June 18 Profit Radar Report (released the night before Bernanke opened his mouth and buried the market) noted that the S&P 500 is at an important inflection point and warned:

There is a parallel channel going back to the October 2011 low. Indexes often touch a previously broken support (in this case the black October 2011 parallel channel at 1,655) before dropping to a new low. The S&P touched this channel today and failure to move above could spell trouble.

The first chart below shows the S&P 500 parallel channel referred to in the Profit Radar Report (if you aren’t a subscriber, I tweeted a close up picture of this channel on Tuesday).

I have often observed the S&P 500 (and other indexes) double back a broken support before letting go and peeling away for good. This upper line of the parallel channel was a key ingredient to the bearish forecast (the recommendation of the Profit Radar Report was to go short at S&P 1,635 and Nasdaq-100 2,970). I call it the ‘kiss good bye.’

Drawn in the second chart is the exact same parallel channel for the SPDR S&P 500 ETF (SPY). However, unlike the S&P 500 Index, SPY’s channel is placed differently. There was no kiss good bye for the SPY ETF.

Key support (red line) was broken for both, when prices dropped below the June 6 low (160.25 for SPY and 1,598.23 for the S&P 500).

The SPY chart allows us to draw a support trend line (green line) that’s unique to SPY. I wouldn’t say there is a clear winner in the SPY vs S&P 500 debate, but I prefer to base my S&P 500 technical analysis on the S&P 500 chart. It’s as pure as it gets.

Why further down side is still ahead, what the down side is, and why stocks will rally again when this is all over is discussed in Thursday’s special Profit Radar Report.