As expected the major averages did pullback some in the early part of the week but were able to bounce off of key short term support areas which allowed them to rally on Thursday and Friday.
The Dow had a support area near 12420 which was at its 50 Day EMA (blue line) and along its newly developed upward trend line (brown line) from the mid March low. Also the Dow has now cleared its last possible resistance area near 12600 which corresponded to its 76.4% Retracement Level (calculated from the late February high to the mid March low). If the Dow continues higher its next major area of upside resistance would be at its previous February high near 12800.
The Nasdaq held support along its newly developed upward trend line (brown line) near 2450 and also has risen above its 76.4% Retracement Level. If the Nasdaq continues to rise its next area of upside resistance would be at its February high near 2530.
As for the S&P 500 it held support near the 1434 level which was near its 20 Day EMA (green line) and newly developed upward trend line (brown line). The S&P 500 is now only about 10 points away from its February high which may act as a significant area of resistance.
I'm sure at this point many investors believe the major averages are now going to rise above their previous February highs by the end of the month. However I would caution you that we have to be on the lookout for two possible chart patterns that could develop in the coming weeks in the S&P 500.
The first chart pattern that we could see develop is a bearish Double Top pattern. RYL provides a good example of what a Double Top pattern looks like on a weekly chart. Double Tops can be followed by a substantial sell off in an index or a stock for that matter fails to rise above its previous high.
Now if we look at a chart of the S&P 500 on a weekly scale one can argue that if it does rise back to its previous February high near 1462 and is unable to rise above that level then that could lead to a Double Top pattern much like shown above.
Meanwhile the second type of pattern which may not initially be bearish in the near term but could become so further down the road is an Elliot 5 Wave Pattern. A brief review of a 5 Wave Pattern shows that waves 1, 3 and 5 are upward moves while waves 2 and 4 are corrective waves. Also notice that once the final 5th wave ends completing the 5 Wave pattern this is then followed by an ABC type correction.
If we look at the chart of the S&P 500 one could certainly argue that it's exhibiting the final 5th wave of an overall 5 Wave pattern that began last June. However keep in mind the final 5th wave will typically rally above the peak of the 3rd wave which in this case was at the 1462 level. Of course how far above the 1462 level it could rise before the 5th wave ends and an ABC correction develops is anyone's guess. However I believe we may see one of these scenario's play out in the coming weeks. For the bullish crowd they certainly will be hoping the S&P 500 doesn't stall out at the 1462 level as that could lead to an abrupt end to the latest rally that began in mid March. Thus what transpires at the 1462 level in the S&P 500 may determine the fate of the other major averages in the coming weeks.
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