Fibonacci analysis shows Wall St's bullish run could break records

While the Australian share market is sitting well below its pre-financial crisis highs the broader US market, represented by the S&P 500 index, is in record territory. It moved past its pre-global financial crisis peak of 1576.09 in April and now sits in uncharted airspace inviting talk of a bubble as this week's chart, produced by Philip D'Souza of the Australian Technical Analysts Association, shows.

The weekly chart demonstrates that the S&P is in a bullish phase after coming off a low point in the week of November 25, 2011. Then the market was down 10.37 per cent from the top of its previous upswing represented by the rising green line to the left of the red downward line at November 25. That low point set the stage for a series of higher high and higher low swings which saw gains followed by retractions of between 10.94 per cent and 4.8 per cent.

The time magnitude of the downswings was between four and nine weeks. Those figures suggest that if the market continues to climb it will continue the path of higher highs and higher lows with downswings within the time and distance magnitudes experienced in the recent past.

By combining those time and distance magnitudes with Fibonacci number retracements we can get some indication of where the market will head in coming weeks. At the time of writing, the chart was showing the S&P almost at a Fibonacci retracement level of 2. That means the market has gone up by twice the magnitude of the most recent down cycle marked by the red line.

Should the market break above this level then the next level of resistance will be at the Fibonacci retracement level of 2.618, 61.8 being a significant Fibonacci point. That would put the market into record territory at 1864.79 points.

However, were a correction to occur then Fibonacci retracement levels measured downward from 1813.25 would come into play. These are marked on the chart in red and range from a retracement of 0.382 or 1749.73 points to a retracement of 1.618 at 1543.21. Any downward progression through these levels would experience added resistance by the existence of peaks and troughs from the market's upward move that would turn to support levels.

Watch if the market begins to fall as each resistance level could provide a buying signal where a rally may commence.

The market could sustain some significant falls and still remain broadly in an upward trend. However, if it were to test and convincingly break below 1601.02 and then 1543.21 it could signal a trend change. Historically, the market tends to rally around Christmas.

This column is not investment advice.

rodmyr @gmail.com.

Keep on climbing