On February 19th I tweeted the following chart. It’s a three year chart of the Value Line Arithmetic index, an equal weighted measure of 1700 or so U.S. stocks:
The Value Line Arithmetic,equal weight 1700 US stocks.In massive downtrend, failed at prior breakdown @CNBCFastMoney pic.twitter.com/fHGwILTexJ
— Dan Nathan (@RiskReversal) February 19, 2016
I followed this with an 8 year chart:
I guess more troubling is the break of the uptrend from the 2009 lows $VALUA@CNBCFastMoneypic.twitter.com/wltKpLDsSs
— Dan Nathan (@RiskReversal) February 19, 2016
Since then the index is up a little less than 3%. On Twitter I was asked by a guy with different worldview of the current investment landscape to my own, to update my take on this two charts. The point of highlighting the 3 year and the 8 year charts was not to make a call about the next few percent in either direction, but merely to express what I (and many other market participants) have been tracking over the last year, a sea change in equity market breadth vs the prior few years.
The first chart, showing technical resistance at prior support was clearly important on a near term perspective. The index worked through it, and many would think that we are off to the races. But a look at the second chart shows that any failure at or below the uptrend that had been in place since the 2009 lows would place that much more importance on the 4th test of 4050 in less than a year.
So here’s what I see now. I see near term resistance at 4200 (the August low) but a move higher to the downtrend near 4400, just below the index’s 200 day moving average (yellow line) could also be a possible magnet and would mean this bounce could have more upside. If the index were to get back to 4400 that would equal an 18% rally from its January 20th low, but still leaving it down 10% from its all time high made last spring:
My intermediate term bearish thesis wouldbenefited from any and all technical failures at obvious resistance levels. But no one has a crystal ball. This kind of correction can take time. And a little over-exuberance by traders and investors on counter-trend rallies are crucial in the process.
So was 42o0 in the VALUA a good spot to take a shot on the short side? No doubt about it. But there are other spots that will be great too. Until proven otherwise, I think rallies can be sold at technical resistance and buying near the tops of these counter trend rallies is likely to get investors offsides during the next bout of downward volatility. That’s just my worldview, I respect that yours may be different, and trust me I am not lobbying your to change yours. Mine is built of a whole host of inputs, charts and potentially arbitrary lines are merely one, that happens to be in constant movement.