The S&P has broken out to the upside from a clearly defined, head and shoulders bottom formation. The standard measuring implication is that the market will move as far above the breakout point (green dash line) as the head (labeled with a green H) was below it. This works out to an upside target of 1405 or so (blue dash rectangles).
In fact I think the market is going to break above its March-April highs by a substantial amount and will visibly exceed the target shown on the chart above. The rally from the June 4 low has developed against a steady drumbeat of despair over the ability of the EU to heal its economic sickness. Market sentiment also has been steadily bearish during the rally which began with a bullish divergence in my advancing issues oscillators.
The ability of the market to rally on bad news was actually emphasized today by its response to the Fed announcement. The Fed said that it was going to extend "operation twist" until the end of the year. In my view this was actually a bearish piece of news for two reasons. First, operation twist is a purely cosmetic change in the composition of the Fed's balance sheet, not a balance sheet expansion which is what is needed now. Second, the Fed scheduled a tentative December end for the program. This is beyond stupid. It guarantees that the market will discount the end of the program well ahead of time and that any stimulative effect "twist" might have had will thereby be negated. What the Fed should have said was that it would continue operation twist until the economy moved onto a normal growth path of 2-3% real and about 5% nominal GDP growth.
The S&P dropped only 7 points after the Fed announcement, a surprisingly bullish response to what I thought was quite bearish news. It has since rallied to new highs for the day and is flirting with its rally high. This response to the news shows that the underlying technical condition of the market is very, very strong. By this I mean that longer time frame traders and investors have on average bigger than normal long positions while shorter time frame traders have smaller than normal long positions. Shorter time frame traders are going to have to bid prices up a lot to entice longer time frame traders and investors to sell shares back to them.
The S&P is going much higher over the coming weeks and months.