S&P 500 Technical Charts

Let’s explore several ways to view the last 1+ year of S&P 500 price behavior through charts.

There are no absolute laws in finance as there are in physics, chemistry and mathematics; just long-term tendencies arising from seemingly random short-term price moves, punctuated by infrequent large price declines followed by gradual recovery. However, some chart patterns are useful to suggest which tendency is more likely than not to follow particular recognizable price patterns. 

Realize that the movement of stock prices does not reflect the view of all holders, but rather of the active traders most of the time and the last traders to act.  In the short-term price movements are not based on fundamentals of valuation, but rather on news flow and sentiment. There are vast pools of quiet holders who are doing nothing while the price moves up, down and sideways on the charts. For most investors, most of the time being part of the quiet money by doing absolutely nothing is the best course of action.

Visual interpretation of chart patterns (“technical analysis”) at a minimum has validity in that over time technically oriented investors have come to expect prices to tend to react to certain chart patterns in a certain way. Whether the pattern can be traced back to specific fundamental, macro-economic or sentiment causes becomes somewhat unimportant if time and time again certain patterns fairly reliably are followed by certain price behaviors. Technical analysis becomes self-validating as traders in the aggregate come to believe that chart pattern signals move prices in a certain way with favorable probability.

For those of us who are not traders, chart analysis can still be useful by believing in the believers tendency to act, as we decide things like should I buy that fund or stock today, or wait for the chart pattern to improve. Accordingly, for those of us who have reserve cash that we want to put to work in US stocks, the current chart patterns suggest waiting a bit for the pattern to resolve its trend direction intentions, although if you have a 5-year to 10-year perspective, the charts might be more useful as entertainment, the same way you might watch a football game, just to see who wins.

And by the way, the football analogy for support and resistance isn’t a bad one. You could think of support and resistance price levels as analogous to the defensive line players in football, and the price as the ball carrier, trying for a first down or a breakout run for a touchdown. When the defensive line (the support or resistance level) is effective, the ball carrier (the price) is prevented from making headway, and may actually be pushed back a bit.  When the defense is not effective, the ball carrier (the price) breaks out and moves past the line of defense (the support or resistance level) until tackled (a short price move past support or resistance) or finds and open field to run with major yardage gain.

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Dick Kaplan 1 year ago Member's comment

Interesting football analogy. I wouldn't have thought of that.

Richard Shaw 1 year ago Author's comment

Thank you Dick.