S&P 500 May Be Above 2000 but There's Still Downside Risk

 

NEW YORK (TheStreet) -- Whenever a major equity average reaches a major milestone, investors should look at the charts to evaluate the risk/reward of that index. The S&P 500 closed above 2000 for the first time on Tuesday so its time to evaluate its daily, weekly and monthly charts.

Courtesy of MetaStock Xenith

The daily chart for the S&P 500 shows its price pattern since trading as low as 1343.35 on Nov. 16, 2012. The key for the uptrend was the close on Nov. 21, 2012, above its 200-day simple moving average (green line) at 1382.93. This moving average has not been tested since than and it's at 1876.2 Wednesday morning. The study in red at the bottom of the graph is the 12x3x3 daily slow stochastic at 92.97. This is extremely overbought as this reading is well above the overbought threshold of 80.00.

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Going back 20 years the S&P 500 has tested its 200-day simple moving average in every year except 2013 and 2014 year to date. Investors should consider booking profits on a high probability that the 200-day SMA will be tested before the year ends. Keep in mind that the 200-day SMA is considered a short-term "reversion to the mean."

Courtesy of MetaStock Xenith

The weekly chart of the S&P 500 is positive with its five-week modified moving average at 1965.74. The green line on this graph is the 200-week simple moving average, which was last tested at 1142.81 in October 2011. Today this average is at 1502.84. This moving average is considered a long-term "reversion to the mean."

Also shown is the uptrend that connects the low of 666.79 set in March 2009 goes through the low of 1074.77 set in October 2011. At the end of 2014 this trend is at 1584.26.

Note that the high in October 2007 was 1576.09. The all-time intraday high at 2005.04 set on Tuesday is 27% above the 2007 cycle high. The S&P 500 is up 200% from its March 2009 low. These statistics are another reason to book profits.

Courtesy of MetaStock Xenith

The monthly chart for the S&P 500 is positive but overbought with its five-month modified moving average at 1891.70 and its 120-month simple moving average at 1327.18, last tested 1165.17 in October 2011.

An important observation from this graph is to compare the strength since October 2011 to the Crash of 1987. That painful volatility can barely be seen at the lower left corner of the graph.

The S&P 500 has not had a 10% correction for a long time. This is another reason for caution. In my opinion a correction of 10% will not happen as my annual value level is 1539.1 which is downside of 23%.

One way to trade the S&P 500 is the SPDR S&P 500 ETF (SPY) ($200.33).

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If you are a buyer on weakness consider doing so on weakness to semiannual and annual value levels at $178.73 and $153.89, respectively.

If you are looking to book profits on additional strength consider selling on strength to my quarterly and semiannual risky levels are $204.92 and $207.51, respectively.

At the time of publication the author held no positions in any of the stocks mentioned.

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This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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