S&P 500¡¯s upside potential limited, but index could go higher

Serge Berger is the head trader and investment strategist for The Steady Trader. Sign up for his free weekly newsletter.

All it took was the resignation (or at least a pledge to step down) of the Italian Prime Minister Silvio Berlusconi yesterday, and stocks rallied hard off their daily lows to close at their highs. Such strong closes have a tendency to lead to gap-up opens the following morning.

In true risk-chasing fashion, cyclical stocks like financials and energy led the day higher as fund managers hopped on board in hopes of improving their year-to-date performance.?

On the chart of the S&P 500, we note that we are again nibbling at the upper end of the 1,200-1,300 range I��ve been discussing for the past two weeks. At yesterday��s close, the index sat at 1,275. As such, upside is limited to about another 25 points, or 2%.

For most, the risk/reward here is not great, and I don��t see the need for chasing this market. For the more active trader, though, 2% upside (should we get it) may be well worth it as the 1,300 area could act as a magnet.

The downtrend from the highs of this year comes in a few points above 1,300 and could be reached. However, before that is the 200-day moving average at 1,272, which we closed just slightly above yesterday.

The 30-minute chart of the S&P 500 shows the upside a little better with the triangle wedge that broke to the upside yesterday. The gray zone may act as a magnet. The stochastics oscillator is in overbought territory but can remain so for a while longer. Stochastics and many other oscillators are best used when they show divergence to price.

While equities rallied and are getting dangerously close to major resistance points again, the U.S. dollar index has snuck above the key 76 level where it is looking to build a base. The inverse relationship between the dollar and equities remains intact, and if the dollar index is able to rally off the base near 76, it should coincid! e with e quities running out of steam.

Oil, too, is hitting solid resistance areas as indicated by the United States Oil Fund (NYSE:USO). Oil itself has actually rallied above initial resistance at $90 and its 200-day simple moving average. However, times are volatile, and I only want to use it as an indicator to the broader equity market.

All in all, the outlook remains the same: While equities may have a little upside left, they should soon run into resistance again. Nimble traders can play the remaining upside while longer-term investors should probably watch from the sidelines.