S&P Ready to Break Out?

09/20/2010 5:08 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

Finally!

After toying with investors last week, the Standard & Poor’s 500 closed above 1,140—at 1,142.71—Monday, September 20.

That takes the index above the top of the trading range for the last four months. Stocks have now set a higher low in August and a higher high in September.

That’s important—and not because it’s a signal that in the short term, stocks are going to rally like it’s March 2009.

A move like this is significant, because of what it tells us about where we’ve been since the market put in its 2010 high back on April 23 at 1,217.

The fear since then was that as stocks dragged lower—setting lower highs at each stage of that move, into August—the rally that began in March 2009 was over and that stocks were headed into a new bear market. That would have been a huge disappointment. A rally after a huge bear market that lasts just a little more than a year is extremely short by historical standards.

A new high in September, though, argues that rather than being the beginning of a new bear, the moves since April make up a consolidation of the moves since last March in preparation for a new stage that continues the rally from this new foundation.

The most likely course from here isn’t some pedal-to-the-metal rally; most consolidations don’t work like that. It takes more than one move to a new high to build a foundation for the next sustained move to the up side.

The most likely next move for stocks will be for them to fall back after setting the new high today. They could well stretch higher, and much will depend on the spate of housing data that arrives Tuesday, Wednesday, and Thursday. If the numbers surprise to the up side, it’s likely that momentum will take us higher in the short term.

But I’d be very surprised if stocks stage an assault on the April 23 high of 1,217 without pulling back to build a new foundation.

If I’m right about what this break above 1,140 means, then that pullback would be to a higher low. And then stocks would be ready to take another shot at a higher high, somewhere over today’s 1,140.

Watch Jim’s video on where the S&P 500 is going.

Related Articles on STOCKS