S&P 500 Chart – The Art of Technical Analysis

This S&P 500 ($SPX) chart shows the past three months of daily prices after the index finished the week at 1,315.38 on Friday, January 20, 2012.

As I mentioned last week in my Dow Jones chart, technical analysis can be an art as much as a science when using certain technical indicators.  Three of my go-to indicators are trend lines, moving averages and Willliams %R.  None is telling the story of a major sell off coming yet on a scientific view, but the art behind them might be whispering something different.

The S&P 500 moved to the top of its trading channel again on Thursday and hit resistance at the trend line of higher highs.  Each time it has done this over the past month it was foreshadowing of a few points lower in the coming days for the index.  Lately it’s only been a few points, some sideways days and then another run higher.  As with each pattern, this only works for so long.  So after the third touch to the upper trend line I started to wonder if this is the last time the large cap index will use this same trend line without having a bigger dip.  The science says don’t ditch the rally until the lower trend line has broken.  The art says to be wary after such a long run.

The lower side of the trading channel is approaching 1,300 quickly and would allow for a 15 point drop, barely more than 1%.  1% is hardly worth noting, except that this has been the pattern since mid-December and is due for more of a shake-up.  The lower trend line of higher lows that started in November could easily be a good area of support 40 points lower.  This would allow a 3% step down and allow in more buyers who missed the beginning of the rally, but are scared to get in at the current level.  If it happened quickly enough it would move the S&P close to its horizontal line of support around 1,267.

The science behind the moving averages says ride the rally.  We haven’t seen any bearish crossovers and the SPX is above each time frame I watch.  The art says the SPX has moved so far above its moving averages that if we wait until they have a bearish crossover we will have missed the first 3-4% of the sell off.  Since I’m bullish for the year, I’m not sure how big of a sell off we’re going to get and missing 3-4% could be half, if not most of a sell-off in 2012.  The moving averages certainly don’t call for shorting quite yet, but they do indicate it might be time to take more off the table to see how the next week or so plays out.

Williams %R hit the ceiling of its indicator for overbought on its 14, 28 and 56 day periods.  I always preach the science says don’t sell until the indicator has fallen below the overbought range for more than two days.  The art says going neutral at these extreme levels can be a safer way to work the indicator.  Williams %R can stay in the overbought range of long periods of time, but rarely stays this close to the “-0” area for long.  Williams %R isn’t showing a sell signal, but it is saying the gains from here should be limited.

Volume is still stuck in the lower side of its average.  Friday’s pop was probably only due to January options expiring.  I’m taking it with a grain of salt, especially with the flat day we ended up with.  Indicators aren’t saying its time to run for the hills yet, but with so little upside available with all of the indicators, there’s not a lot of reason to be heavily invested right now.  The downside appears to be the path of least resistance over the next couple of weeks.  That doesn’t mean it can’t melt up, but any spike seems like it should be sold as a last ditch effort by the bulls.

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1 Comment

  1. Comment by Ronan

    I agree with your analysis and am waiting patiently for a 5-10% drop.

    The following is what I’m holding at the moment:

    AEM: Short Feb 32.50 Puts at $0.70 each
    JCI: Short Feb 30 Puts at $0.45 each
    VXX: Short Feb 25 Puts at $0.65 each
    BP: Long shares and Long Jan 2013 50 Call – looking to sell Covered Calls at a 45 or 46 strike for February expiry on any pop higher

    Everything else is in cash – about 65%.

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