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How Far Can the S&P 500 Rally After the Fed Event?

The S&P 500 has been like a steamroller, ploughing to all-time highs. Here's how to trade the index after the Fed symposium.

We had some really interesting action in the stock market last week, which was dominated by the Fed’s event on Friday.

During the week, traders navigated several days of Fed speakers, with Chairman Jerome Powell due on Friday morning.

The early part of the week was dominated by low volume and slow trading. On Thursday we saw some jitters, as the S&P 500 shed 58 basis points.

However, Friday is where the fireworks went off. Bears were looking for Powell to say something — anything — that would give us the long-awaited pullback.

But they didn’t get it. 

Instead the S&P 500 tapped the 10-day moving average and ripped almost 1% to new all-time highs. It’s doing it again on Monday, with the index up another 25 points or about 0.6%.

FAANG, Microsoft  (MSFT) - Get Microsoft Corporation (MSFT) Report, Tesla  (TSLA) - Get Tesla Inc Report and others are helping move the index higher, even as the Dow and Russell struggle.

Earlier this month, Goldman Sachs’ analyst David Kostin assigned a price target of 4,700 by year end.

Let’s see what the charts are telling us and if the index can get there. 

For what it's worth, investors can also use a similar extrapolation of this setup for the SPDR S&P 500 ETF  (SPY) - Get SPDR S&P 500 ETF Trust Report

Microsoft is a holding in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells MSFT? Learn more now.

Trading the S&P 500

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Daily chart of the S&P 500.

Daily chart of the S&P 500.

Coming into Friday, I was carefully watching Thursday’s low and the 10-day moving average. 

While the 10-day and 21-day moving averages have been great short-term support levels, it’s really been all about the 50-day.

This moving average has been acting as strong support all year and particularly since May. Even as growth stocks were slogging through a bear market in early May, this moving average provided excellent support to the S&P 500.

Earlier this month, we got a near-test of this mark, followed by a robust rally.

My observation was simple: Either we hold Thursday’s low and the 10-day, and run to new highs or we break these marks and risk a dip to the 50-day moving average.

The former of the two played out.

Now on the upside I am using a target of 4,550. Not only is this a nice round number, but it’s where the 161.8% extension of the most recent test of the 50-day moving average comes into play.

In every test of the 50-day dating back to March, the S&P 500 has achieved this price target.

Above 4,550 and 4,600 is possible, followed by the 261.8% extension at 4,660 — although we may need some consolidation before rallying that far.

On the downside, keep an eye on the 4,500 level and the 10-day moving average. This was a breakout level, while the 10-day has been short-term support. Below that opens the door to 4,480 — the prior all-time high — and the 21-day moving average.

Below all of these levels and the all-important 50-day is back in play.