Tag Archives: Technical Analysis

how high is “high” for the S&P 500 now?

March 3, 2016 By in Technical Analysis, Uncategorized Tags: , , , , Leave a comment

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?

Simple.

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.

dealing with high daily volatility

February 4, 2016 By in Technical Analysis, technical bounce, Uncategorized Tags: , , , 1 Comment

To state the obvious, we’re in a period of high daily volatility in the trading of stocks around the world.  What I find particularly striking is that we’ve had two days recently–January 20th and yesterday–where stocks in the US made dramatic intraday shifts in direction.  In both cases, heavy early selling that pushed indices down sharply was followed by a late reversal that wiped out most, or all, of the previous losses.  In my experience, this rarely happens once–to say nothing of twice, and within a couple of weeks of each other.

I’ve got little clue as to why the going is so choppy.  I imagine that algorithmic trading has something to do with it.  Sovereign wealth fund selling may be playing a role.  Investment banks reining in proprietary trading, thereby removing liquidity from the market, could be a factor, too.  I don’t believe that either oil or China are much more than straws the financial media are clutching to.

Still, I find it very strange.  The closest analog I can think of is the period following the collapse of the internet bubble in early 2000.  But even that wasn’t that much like the present.

My thoughts:

  1. The intraday reversals may be significant technical events.  Sometimes, they signal market bottoms.  In both recent cases, the market did bounce up off important support lines.  Time will tell, especially since markets have a habit of returning to prior lows after a month or so before resuming a new direction.
  2. Blackrock, the largest investment manager in the US, seems to be calling into question whether daily volatility really has any significance for ordinary investors.  Presumably, we all have equity investment horizons of three to five years.  So what do daily ups and downs matter? This is just common sense, in my view, and harks back to traditional Wall Street beliefs.  It is, however, heresy to devotees of the (wacky) academic theory of finance taught to in MBA schools.
  3. As a practical matter, you and I will never be able to outtrade high speed computers, or even low speed ones–or professional human traders, for that matter.  We don’t have–or want–the mindset.  We have lives; we aren’t interested in watching stock price feeds all day.  Our main advantage over traders is that we are willing and able to take a longer investment horizon.  We try to be aware of the shape of the forest, not the height and width of each individual tree.
  4. We can look for anomolies, though.  Yesterday is a case in point.  We can look for stocks that didn’t follow the herd.  Issues that went down less than the market in the panicky morning selling and rose more the the average during the afternoon rebound are probably worth looking at more closely as buy candidates.  The reverse is also true.  Stocks we own that sold off more heavily than the average in the morning and rebounded less have got to be reexamined for whether we still want to hold them.
  5. It’s conceivable that high daily volatility is the new normal.  Who knows.  But if so, we should consider what else we can to to turn this to our advantage.  More limit orders when we trade?  More aggressive limits?

 

Jim Paulsen: lower lows, but not by much

January 26, 2016 By in Current Market Thoughts, major changes in market direction, market bottoms, Recent Market Action, Uncategorized Tags: , , , , , 1 Comment

Jim Paulsen, equity strategist for Wells Capital Management, an arm of Wells Fargo, gave an interview on CNBC yesterday.  It’s well worth listening to.

His main points:

–the stock market decline we’ve seen since November is all about adjustment to lower future earnings growth prospects.  This is being caused by the resumption of “normal” growth as the bounceback from deep recession is completed.  Another aspect of the return to normal is the economic drag from gradual end to extraordinary monetary stimulus, at least in the US.

In Mr. Paulsen’s view, the S&P 500 can trade at 16x trailing earnings in this new environment, not the 19x it was at two months ago.

–we may have seen the lows for the year last Wednesday at midday (1812 on the S&P 500).  More likely, the market will revisit those lows in the near future.  It will break below 1800 on the S&P, creating a fear-filled selling climax.

–assuming, as he does, that the S&P will end the year flat, i.e. around the 2044 where it closed 2015, a buyer at yesterday’s close would have a 9% return (11% dividends) from holding the index by yearend.  A buyer at 1800 would have a compelling 14% (16%) return.  11% might be enough to attract buyers; 16% surely will be.

–2017 will be a stronger year for earnings growth than 2015, implying that the market will rise further as/when it begins to discount next year’s earnings growth.

–the current selloff will trigger a market leadership change.  The new stars will likely be industrials, small-caps and foreign stocks.

three S&P 500 levels to watch

January 15, 2016 By in Technical Analysis, Uncategorized Tags: , , 1 Comment

I’ve written before that when all else fails, when there seems to be no rhyme or reason to the daily movement in stock prices, even the most fundamentals-oriented portfolio manager closes his door and starts to look at charts.

At one time, technical analysis was a respectable occupation–no door-closing needed.  But that was in the first quarter of the last century, before the Federal government began to force publicly traded companies to present meaningful financial statements.  It’s also before Washington clamped down on manipulative behavior by large investing syndicates and on trading on inside information, types of activity that studies of trading volume and daily price movements were designed to detect.

However, when stock prices are being driven by greed, or in the present case, by fear, it may make sense, even in today’s data-filled world, to take a look at index points where investors have been willing to buy and sell in the recent past.

 

Three S&P 500 levels stand out to me.  They are:

–1867, which is the intraday market low of August 24, 2015

–1871, which is the intraday low the market returned to on September 28, before starting to rise again, and

–1904, which represents a 10% decline from the latest intraday high of the S&P 500 on last November 3 (the close that day was 2109–a 10% decline from the close would be 1898).

 

The S&P 500 fell sharply to 1878 in early trading yesterday, before reversing itself and closing at 1921.

The market closed at 1890, two days ago, which is more than 10% below both the high and the close of last November 3rd.

 

In technical terms, then, we’re at an important juncture.  We’ve fallen by 10% from the highs and are flirting with an important low around 1870.  As I’m writing this, futures are indicating an open for the S&P around 1880.  This in itself could be a source of traders’ anxiety.

If the market can stabilize at current levels, it’s possible that fear will gradually ebb away.  If not, we’ve got to go back to the drawing board and figure out where next level of potential market support may be.  1815?