If you were to search on the internet for methods to predict stock market returns you would find a lot of different ideas. Everyone claims to have the crystal ball of what is going to happen. An interesting quote from Edger Fiedler is “He who lives by the crystal ball soon learns to eat ground glass.” The truth is that no one really knows for sure. However one idea to use to predict stock market returns is to use technical analysis on the S&P 500.

The S&P 500 is nothing more than a collection of the stock prices of 500 large-cap common stocks traded in the United States. These 500 companies trade on either the New York Stock Exchange or NASDAQ. It is becoming more followed than the Dow Jones Industrial Average and is considered a bellwether of the American economy. Using technical analysis on the S&P 500 you may be able to predict what the future may hold. At least you may be able to determine what your current action should be.

If you were to look at a chart of the S&P 500 over the decade of the years 2001 – 2010, it would literally scare you. The amount of volatility in the market is astounding. There are enormous swings both upward and downward. The stock market literally did not know where it was going. If you were lucky enough to be in the correct investments on the upward swings you had the potential to make a lot of money. . If you were to go to the site http://www.moneychimp.com/features/market_cagr.htm which is a good chart of the S&P 500 you would notice that in 2006 the market went up 16% and then in 2007 dropped to 5.5%. In 2008 it dropped further to a negative 37% and then swung upward in 2009 to a growth of 27%. If this were a company you were looking at investing in, you would run from the investment due to the volatility.

The problem is that this is not one particular company, this is the stock market and you as an investor need to decide what you are going to do. The question now is concerning 2010. What will the stock market do in this period of time? Using a chart found at CNNMoney.com, http://money.cnn.com/quote/chart/chart.html?pg=ch&symb=SPX, various scenarios can be plugged in and some technical analysis ideas performed.

One item to look at is using the Williams %R analysis technique. This is a method developed by a trader, Larry Williams, and its purpose is to tell whether a stock is trading near the high or low or somewhere in between of its recent trading range. If you were to change the time to one month, the frequency to daily, the lower indicator to Williams %R and then create the chart, you would find that the Williams %R is at the top of the chart or at zero. According to expected interpretation of the analysis, this indicates an overbought situation. According to Larry Williams, when the analysis reaches zero and then begins to drop, it may be time to sell. The analysis indicates that the market will then trend downward.

Since October, 2009 the S&P 500 has been trading within a range between 1000 and 1150. Until it breaks out of that range, either upward or downward, the technical analysis probably does not mean much unless you are a day trader. If you are invested for the long-term, then it is probably right to hold the course and watch the trends. If the stock market breaks out of this trend then further analysis and study of current economic conditions is warranted.

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Tags: correct investments, overbought situation, stock market returns, volatility in the market