A buying opportunity is emerging

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The S&P 500 index has been trading to plan, more or less, for the past 12 months. Someone asked me last week with pleasant surprise as to my accuracy of forecasted levels, “Are you using some kind of black magic to predict your levels?”

The answer clearly is no. Investment requires keeping one’s finger on the pulse of sentiment and charts enable this.

In investment analysis, there is no one method that is better than another. But since I specialise in technical analysis, let’s take a look at what the charts are saying about US stocks.

The charts are indicating that the S&P 500 is in need of a pullback in the order of 4% to 1,382, and perhaps 5% to 1,368.

The index has already gone up 16% from the low of 1,266 on 4 June to the peak of 1,474 on 14 September; a gain of 16% in this climate of economic instability is more than one can ask for.

A market that goes up too hard, can’t sustain upward momentum and sets itself up for heavy falls. We are very far from this sort of bullish-type sentiment, which is why a 4% fall to a 5% fall has been placed into the ‘Positives’ list in my assessment below. It will be healthy to have such a retracement so even higher levels may be sustainable.

For those who missed this run up, your opportunity to enter the US index should present itself in the coming weeks.

For those who want to add to their portfolio, the same applies.

US S&P500 1,440 “A Retracement of 4% Lower Would Be Healthy”

Positives

1) All the upside targets have been met. My target of $1,448 was reached and breached on 14 September 2012 with a high of 1,474.

2) The index fell back below a week later. The peak of 1,474 represents an increase in the index of 16% in the index in three months. This is too much, and is now due for a retracement.

3) A retracement of 4% to 1,382 is not unreasonable and is welcome. This would take the index to be up 9.1% since 4 June. If it does this, it can build from that nice base without needing a more substantial set back.

4) The next level is 1,368 or 5% lower. If it goes to this level and recovers, the market is still very much on track.

5) The market has recovered very nicely as expected.

6) QE3 has been announced, and gold has ‘broken out’ of a 12 month plus sideways consolidation. In fact, it broke out two weeks before the actual announcement.

Negatives

1) I have cited the Shanghai Composite index as a concern. This is due to the number it’s reading – 2,086 – however, I’m encouraged that we appear to be approaching a bottom. The index has been working very hard, trying to hang on.

2) Shanghai falling below 2,000 could be a cliff. On 26 September it traded at 1,999, only to close 2,004. This is too close for comfort.

3) The positive points 3 and 4 above point to a market fall as being a positive because the market in my opinion needs a fall. The charts are indicating that there is an outside chance the falls could take a life of their own and go deeper than expected. This presents a buying opportunity.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Anyone should consider the appropriateness of the information in regards to their circumstances.

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