Why July Could Bring a Rally in the S&P 500

The market has been a mess recently…

Thumbing through the financial pages of any newspaper, I could pick out a half-dozen conflicting, convoluted, or crazy market predictions for the second half of 2011. And none of it is doing much good for individual investors.
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When the volume of noise on Wall Street gets too high, it makes sense to tune it out and take a look at the only data points that matter. I’m talking about the technical charts.

Today, I want to show you why the S&P 500 Index could be in store for a rally this month, and what it means for your own portfolio…

First though, a bit of background. As far as I’m concerned, the S&P 500 is the most important index for stock investors to watch. It’s made up of the 500 biggest stocks on the market – so it’s a pretty good proxy for the stock market as a whole. Here’s a look at what the S&P 500 has been doing for the last year:


Even if you’re not an experienced technical analyst, you can tell a couple of things about this chart right off the bat. For starters, the market has moved significantly higher in the last year. And the market has hit a sort of “ceiling” ever since the middle of February.

That ceiling sits at around 1,350…

With the exception of a few trading days in early May, the S&P 500 hasn’t been able to sustain a climb above 1,350 in 2011. As a result, 1,350 is a price level that technical analysts refer to as a resistance level. It’s a price where supply of stocks exceeds demand.

But resistance levels do eventually break – and when they do, rallies can ensue.

Since the S&P 500 is such a significant barometer for the broad market, investors can benefit in a big way by holding stocks when that sort of breakout occurs. The trick is spotting when.

Here’s a zoomed-in look at what’s going on in the S&P right now:


The index is showing us a technical formation known as an inverse head and shoulders pattern. It’s a setup that demonstrates exhaustion among sellers. Most importantly, it gives buyers the signal when it’s time to buy.

You’ll want to keep a close eye on the resistance level in the S&P 500 right now. If the index pushes above 1,350 (and holds there), then we could see a meaningful rally in the S&P.

Remember that this isn’t the first time the index has tested 1,350. Any sort of breakout in the index will need to be significant – not just a flirtation with 1,351. That said, traders shouldn’t underestimate the significance of a push above 1,350 – or the impact it could have on stock prices to end the year.