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Technically Speaking with S&P’s Mark Arbeter: Don’t Expect All-Time High Just Yet recently spoke with Mark Arbeter, Chief Technical Strategist for S&P Capital IQ, about his thoughts on the likelihood of the S&P 500 finally breaking through 1565 and into recently spoke with Mark Arbeter, Chief Technical Strategist for S&P Capital IQ, about his thoughts on the likelihood of the S&P 500 finally breaking through 1565 and into new record territories.

EQ: The S&P 500 has twice in the last week walked just about right up to the all-time high but failed to break through. Is this normal trading behavior when establishing new major highs or is the resistance level stronger than people realize?

Arbeter: When we approach a major high like the S&P 500 is doing here, it is very normal to see a pullback once we get to those highs. Also, because the market has been so strong and been in a very strong uptrend since November, it might just be a bit out of gas here. We’re seeing some daily momentum divergences, which means that the rate of change of the move is declining. Many times, that precedes some kind of digestion or pullback.

From a longer-term perspective, the weekly momentum has cycled into overbought territory. That doesn’t mean the move is over, however, but it could mean that we see some minor pullback here. In addition, we’re also seeing some internal divergences, which means that the number of stocks moving higher versus the number of stocks moving lower is starting to deteriorate. So under the surface, we’re starting to see some deterioration in the market internals or the breadth of data.

EQ: We saw a minor pullback of under 1 percent after the initial try. Is that enough of a digestion of gains, or do does a more significant pullback need to happen?

Arbeter: I think the 1-percent decline is part of a very small topping formation. Over the past couple weeks we’ve seen a lot of sloppy price activity and a pickup in price volatility to the downside and upside. It looks like the S&P 500 is tracing out a very small head-and-shoulders top. Therefore, I think we’re in this very minor topping phase. I don’t think that 1-percent drop was enough to unwind the overbought momentum readings, the divergences we’re seeing, and some of the extreme bullish sentiment levels that we’ve seen. So I’m looking for a potential 3-percent to 5-percent pullback here, which would be about the 1520 to 1530 area over the near term. That would then set the market up for one more lift, and that last lift into the latter spring or early summer would take the S&P 500 finally to its all-time high. But then that would be at a good intermediate-term top.

EQ: So we most likely won’t be hitting the new all-time high in the near future?

Arbeter: If by near future you mean over the next couple of weeks, I would say no. However, over the next couple of months, once this pullback is out of the way—which I see as very minor—then in April or May we could see the S&P 500 jump up to and maybe exceed the 1600 level by a small margin. Once we get above 1600, I will then be looking for an intermediate-term top to play out over the summer, which could take a while to form. Once that happens, we could see a major pullback, if not a decent-sized correction, transpiring into the fall months.

EQ: This year, volatility was expected to increase over a relatively calm 2012. Have you seen that happen so far?

Arbeter: We have not seen much volatility this year—in fact, hardly any. But you usually don’t see volatility until the market is tracing out a top and then declining. So I do expect volatility to pick up, but I don’t think that will happen until the summer and/or fall months.