I know there are some very respected market pundits who don’t think much of technical analysis. But as a long time active market participant, and part time market pundit I can attest that looking at charts, (and being careful that they don’t merely confirm my biases) is extremely helpful in my process of assessing my top down view on markets, and/or my bottoms up view on a single security. Charts are just one input in my trade evaluation process, and can be useful alongside valuation metrics, forward earnings estimates, catalysts, etc etc.
On a day like today I think it is helpful to get a sense of where the largest stock market on the planet is relative to past sell-offs, and where it could be going near term. Obviously, this is purely based on a bunch of lines and levels I have made up in my head, but they point to inflection points that are reinforced by the commonality amongst other participants and what happened at those levels previously. Chart levels can be self fulfilling, for a number of reasons.
Looking at the chart of the SPX since the start of 2014 we can see that there were two epic opportunities to buy fear, first in October 2014, and then again in August of 2015. In both instances panic reached a fever pitch, and then the SPX saw a sharp reversal. But Oct 2014 was very different than August 2015. From the Oct 2014 low to the all time highs made in May of 2015, the SPX barely looked back, gaining 17%. But in hindsight obviously, that was it, and the August 2015 sell-off happened all at once. While buying the capitulation morning was immediately profitable, the SPX was not out of the woods until there was a re-test in Sept of the Aug lows:
But since early Nov 2015 the SPX made a series of lower highs and lower lows that culminated in the first week of the year in a break of technical support at 2000 with a test of the last two major lows.
The SPX looks very different now than it did in October 2014, most importantly the test of the long term uptrend was brief. What’s clear from the 5 year chart below, a period that saw the SPX nearly gain 100% from its 2011 lows to its 2015 highs, is that the uptrend is broken, and there is little technical support below 1800 all the way to 1600:
Merely looking a the 5 year chart, it’s hard to make the case for 1600 as important support, you need to look at the chart dating back to 1999, which shows the mid 2013 breakout above the 2000 and the 2007 tops:
Again, I have no idea what all these lines mean, and to make a decision about allocating capital based on a few charts and opinions derived from them seem a tad silly. But overlay that with some well thought out concerns about the health of the global economy and massive headwinds that the largest economies of the world are faced with in regard to diverging monetary policy, a rolling debt crisis and weak global growth, and I suspect that the pendulum might have shifted over the last few years. Buying fear and temporarily weak price action was a money making strategy until mid last year. Selling rallies, or using easing of selling pressure to reduce equity exposure may be the new normal.
As I have said on numerous occasions of late, reversals and sharp counter-trend rallies are going to happen, but I suspect they lack conviction, and likely more the result of selling exhaustion and short covering. After the sell off in August it was my view that 2100 was a great spot on the SPX chart to reduce equity exposure, or lay out shorts for traders, my view now is that the range looks more like 1950 to 2000.
Since I started writing this post, the SPX has put in a very impressive intra-day reversal, a close above 1864 (the August 24th low) would likely see follow through back above 1900:
This would be a fairly epic spike bottom, with 1950 in the offing:
Here are some of my most recent views on the risks to the global economy and the state of financial markets: