One of the most reliable aspects of human behavior is that we all extrapolate from recent prior experience. We form rules that are at first provisionary, but which gain strength as new experience seems to validate them.
This is the psychological basis for one of the few really powerful axioms of technical analysis, support and resistance.
The idea is that people buy financial assets at prices that in the past have proved profitable entry points and sell at prices that have shown themselves to be relatively high. Put in more negative, but still psychologically valid, terms, I think, people who have previously sold at low points and bought at highs rue their decisions and reverse them if given another chance. This provides, as it were, a built-in clientele of buyers at previous lows and sellers at prior highs.
How do we apply this insight to today’s S&P?
The S&P 500 peaked at:
—2110 on February 20, 2015
—2108 on March 20, 2015
—2130 on May 25, 2015
—2124 on June 23, 2015
—2128 on July 20, 2015
—2102 on August 17, 2015
—2110 on November 15, 2015
—2102 on December 1, 2015, and
—2078 on December 29, 2015.
We closed yesterday at 1986. Fundamentals aside, about 5% – 6% higher than that we run into a wall of people who have been trained that 2100 or so is a time to sell.
Such resistance levels aren’t insurmountable obstacles. Breaking through them, and therefore beginning a new buy/sell training regime, would be a hugely positive sign. But the large number of recent instances when 2100-2130 has proved a market high water mark argues that this is a formidable barrier to advance.