Tech analysts see year-end rally

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The rally has stalled so far this week, but the charts are telling some technical analysts that investors should prepare for big gains as we head into the final month of 2012.

"The S&P 500 looks similar to the lows set in June with both periods cutting below the 200-day moving average and recovering as markets reached very oversold readings," said Mary Ann Bartels, head of U.S. technical analysis at Bank of America.

She is referring to the selloff that began in mid-September, when the S&P 500 fell as much as 8 per cent amid fears of the looming U.S. fiscal cliff of automatic tax increases and spending cuts should Washington fail to agree on a budget. The S&P 500 fell below its 200-day moving average earlier this month, raising concerns that the market was also doomed from a technical perspective.

It then rose for five straight days, ending Friday, marking its best weekly rally of the year. That's where comparisons to June come in: The S&P 500 also dipped below its 200-day moving average in June – and then rebounded some 15 per cent over the next few months as the index rose to multi-year highs. (See the accompanying infographic).

Ms. Bartels believes that the S&P 500 needs to get to 1405 (check) and stay above that level (check) – "and then 1435 is needed to refresh the potential for a sustained rally to target a move toward 1450-1500."

Just don't expect smooth sailing into next year. She believes 2013 is going to be volatile as the "negative divergences are still in place with market breadth and transports not confirming the September highs."

The S&P 500 might also find it difficult to rise above its 2007 highs – if not because of the height, then because of the age of the bull market: It will celebrate four years in March 2013, matching the historical average age of a bull market, Ms. Bartels said.

David Tippin and Ron Meisels at Phases & Cycles also see a rally into the end of the year, partly because investor enthusiasm remains so low.

"Bull markets peak when the 'wall of worry' is superseded by widespread optimism," they said in a note. "Therefore, it is unlikely that the September/October top was the final top, judging by the lack of widespread enthusiasm at that time."

What could wreck this call? If the S&P 500 falls below its June low of 1266.74, the bull market that began in 2009 is done.