By: Chris Rowe — July 22, 2020
The S&P 500 Could Gain 8% in the Next 2 Months—Here’s Why
The S&P 500 Index has made a sharp rebound after the COVID-19 sell-off we experienced in March.
While not an exact science, we can use these support and resistance levels to determine the S&P 500’s minimum price objective (technical analysis lingo for “price target”).
This doesn’t mean that I have a crystal ball telling me exactly where and when the S&P will move higher—far from it.
But by using the rules of technical analysis, we can estimate where its next resistance level is likely to form.
We do this using Fibonacci extensions.
You’ve probably heard of Fibonacci in pop culture. The Fibonacci sequence is a series of numbers that come up often and unexpectedly in math and nature. But technical analysts use Fibonacci numbers to calculate key retracement levels.
Here’s how it works…
How to Find the Minimum Price Objective
First, we need to identify recurring support and resistance levels on the S&P, giving us price points to work with.
Take a look at this year-to-date chart of the S&P 500:
The green lines show a trading range that the S&P has been in for the past seven weeks, from roughly May 26.
The top of the range (resistance level) is at 3,236.96, while the bottom of the range (support level) is at 2,965.96.
The minimum price objective takes the distance of the trading range and measures the same distance higher than the point of breakout.
This is something that you can do automatically with Fibonacci extensions, which is a tool that most brokers should offer.
But for the sake of this article, let’s work this out by hand.
Using 3,236.96 as our breakout point, we can find the next projected price target by adding the same distance from our recent support level.
In this case, this distance from the top of our trading range to the bottom is 271.
So, if we add 271 to 3,236.96, we can estimate that a new resistance level will form around 3,507.96:
This is likely where you’ll start to see more resistance from buyers. But we won’t know for sure if the index will overcome that resistance level or break above it.
Again, this is just an estimation. I can’t actually tell you what will happen in the future.
However, history shows that new resistance levels take roughly the same amount of time to form as the trading range used to find the minimum price objective.
In this case, the S&P has been trading within the 2,965.96 to 3,236.96 range for the past two months.
So, there’s a good probability that the S&P will hit that 3,507.96 price target within a two-month timeframe.
If so, that would represent an 8.37% move higher from today’s current price.
Now, it’s entirely possible that the recent price action we’re seeing in the S&P 500 is just a "fake-out".
That's when the stock market breaks above a key resistance level "faking out" buyers, only to reverse lower. Sometimes large investors manipulate stocks higher above key levels in order to create artificial demand so that they can unload their own shares of stock without pushing prices down.
(Watch this short video to learn how to avoid fake-outs).
But if bullish sentiment holds, we’ll want to get ahead of that buying activity to identify the best trading opportunities.
Having a price target in mind is just one piece of the puzzle. The next step is finding out which sectors to invest in.
I’ll give you more guidance on the best-performing sectors within this index should it continue to rise.
So, make sure to check out future issues of True Market Insider for more updates.
Founder, True Market Insider