Why July Could Bring a Rally in the S&P 500

The market has been a mess recently…

Thumbing through the financial pages of any newspaper, I could pick out a half-dozen conflicting, convoluted, or crazy market predictions for the second half of 2011. And none of it is doing much good for individual investors.
When the volume of noise on Wall Street gets too high, it makes sense to tune it out and take a look at the only data points that matter. I’m talking about the technical charts.

Today, I want to show you why the S&P 500 Index could be in store for a rally this month, and what it means for your own portfolio…

First though, a bit of background. As far as I’m concerned, the S&P 500 is the most important index for stock investors to watch. It’s made up of the 500 biggest stocks on the market – so it’s a pretty good proxy for the stock market as a whole. Here’s a look at what the S&P 500 has been doing for the last year:

Even if you’re not an experienced technical analyst, you can tell a couple of things about this chart right off the bat. For starters, the market has moved significantly higher in the last year. And the market has hit a sort of “ceiling” ever since the middle of February.

That ceiling sits at around 1,350…

With the exception of a few trading days in early May, the S&P 500 hasn’t been able to sustain a climb above 1,350 in 2011. As a result, 1,350 is a price level that technical analysts refer to as a resistance level. It’s a price where supply of stocks exceeds demand.

But resistance levels do eventually break – and when they do, rallies can ensue.

Since the S&P 500 is such a significant barometer for the broad market, investors can benefit in a big way by holding stocks when that sort of breakout occurs. The trick is spotting when.

Here’s a zoomed-in look at what’s going on in the S&P right now:

The index is showing us a technical formation known as an inverse head and shoulders pattern. It’s a setup that demonstrates exhaustion among sellers. Most importantly, it gives buyers the signal when it’s time to buy.

You’ll want to keep a close eye on the resistance level in the S&P 500 right now. If the index pushes above 1,350 (and holds there), then we could see a meaningful rally in the S&P.

Remember that this isn’t the first time the index has tested 1,350. Any sort of breakout in the index will need to be significant – not just a flirtation with 1,351. That said, traders shouldn’t underestimate the significance of a push above 1,350 – or the impact it could have on stock prices to end the year.