THE LINE IN THE SAND
We believe the line in the sand for the U.S. stock market, as measured by the S&P 500 Index (S&P) is 2,125. We believe it is imperative that this price level hold on a weekly closing basis in order for a price rally to ensue in the short run. If prices close on a weekly basis below 2,125, then we believe it is possible another corrective phase may ensue for the stock market.
FROM THE BLUE LINE INVESTING STANDPOINT
Before delving into the technical formations of the S&P, allow us to share a few brief observations from a strict Blue Line Investing standpoint. Probably the most positive observation at this moment is that the S&P is above its blue line – not by much, but nevertheless it is above it. However, with our work we also follow two other economic moving averages. And right now, the S&P is stuck in the middle between these economic moving averages (above the S&P) and the blue line (below the S&P). A potential danger is that if the S&P can not rally soon to rise above the green and purple line, those lines may become resistance. If that happens the S&P very well could begin another corrective phase. In order for a new positive primary trend to begin, we believe a price rally must occur that takes price above all three of these colored lines.
FROM THE TECHNICAL ANALYSIS STANDPOINT
The chart below provides one perspective that illustrates the potential importance of the 2,125 price level. As can be seen, over the past 2 years and 9 months, the market previously formed price resistance at the 2,125 price level on a weekly closing basis (identified by the red dashed horizontal line and red arrows), and has formed price support around the 1,860 price level (identified by the blue dashed horizontal line and blue arrows). Each time the market rallied up to 2,125 the sellers overwhelmed the buyers and prices retreated. Each time the market declined towards the 1,860 price level buyers overwhelmed the sellers and prices rallied. Over recent months we can see prices finally broke up through 2,125. But at present, prices appear to be forming a descending triangle of sorts. If prices can hold the 2,125 level, it is possible they will break up through the downward sloping red dashed line (which would become new support) and move higher in the direction of the blue arrow.
Using the same chart below, but modifying the annotations, provides another perspective that illustrates the potential importance of the 2,125 price level. In this chart, we can see a technical formation called a rising trend channel. Since the bottom of the correction earlier this year, prices have risen to the top blue dashed line where sellers overwhelmed buyers and then prices corrected during the “BREXIT” vote in June and were stopped at the rising blue dashed line making up the “rising channel.” At the time of this writing, price is at the support line for both the rising channel (bottom blue line) and support level (red dashed line).
Using the same chart below, but modifying the annotations one more time, provides a third perspective. Looking at the chart from closing prices only, we can observe a possible “Ascending Wedge” that formed from the rally this year. In late August, prices failed to hold the bottom rising wedge line. They thereafter rallied up to test that line – which failed at #1 – and prices are now again testing the 2,125 price level. The good news is stock market tops do not usually form from this technical formation. So it is possible a price rally could occur very soon, possibly after the election. But the negative news is, at least for the short-term, the top of the ascending wedge coincided with a head-and-shoulders formation which does usually signal a market top. Another reason we believe the 2,125 price level is very important from a technical perspective.
One potential negative is that there appears to be a type of positive divergence forming with the VXX, an exchange-traded note (ETN) that we like to monitor for warnings of potential danger signs in the market (see the chart below). If that positive divergence executes, we would expect the 2,125 price level to be broken to the downside on the S&P. But even if that occurs, we believe it may only be a very short-term price correction. We would thereafter need to see if price can close back above 2,125 on a weekly closing basis to maintain hopes of a new primary positive trend to form.
For existing clients we are always happy to answer any questions you have about our current investment positions, next planned investments, and where we are looking for investment opportunity in the stock, bond, and commodity markets. Thank you for your continued trust and confidence.
Blue Line Investing (BLI) is a disciplined investment process, based on technical analysis research. The process applies trend-following, along with observations of the moving averages of the market. Key to the process is the “blue line”, which is derived from comparing an investment’s price against its moving average. BLI monitors those activities over time in order to determine allocations within client accounts.
“Technically Speaking” is a special report being provided to supplement our monthly BLI MARKET VIEW report. Its purpose is to help clients and investors contemplate the attractiveness or unattractiveness of investing in the stock market, at the present time, using technical analysis and the Blue Line Investing investment process.
The S&P 500 Index is one of the most commonly followed equity indices, and many consider it one of the best representations of the U.S. stock market, and a bellwether for the U.S. economy. It is comprised of 500 large companies having common stock listed on the NYSE or NASDAQ. The volatility (beta) of the account may be greater or less than the index. It is not possible to invest directly in this index.
The iPath® S&P 500 VIX Short-Term Futures™ ETNs (the “ETNs”) are designed to provide exposure to the S&P 500 Index VIX Short-Term Futures™ Index Total Return (the “Index”). The Index is designed to provide access to equity market volatility through CBOE Volatility Index® (the “VIX Index”) futures.
Technical analysis is a method of evaluating securities by analyzing statistics generated by market activity, such as past prices and volumes. Technical analysis attempts to predict a future stock price or direction based on market trends. The assumption is that the market follows discernible patterns and if these patterns can be identified then a prediction can be made. There are certain limitations to technical analysis research, such as the risk is that markets may not always follow patterns. This investment process should not be considered a guaranteed prediction of market activity and is one of many indicators that may be used to analyze market data for investing purposes. There is no guarantee that this process will be successful or will result in the projections contained herein.
This information is intended for educational purposes only. Past performance is not indicative of future results. This material is not financial advice or an offer to sell any product. This is not a recommendation to buy or sell a particular security. The opinions expressed are those of Blue Line Investing and are not necessarily those of Gordon Asset Management and are subject to change without notice. Blue Line Investing reserves the right to modify its current investment strategies based on changing market dynamics or client needs. The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass.
Advisory services offered through Gordon Asset Management, LLC (GAM). GAM is an SEC-registered investment adviser. Registration does not imply a certain level or skill or training. More information about the advisor, its investment strategies and objectives, is included in the firm’s Form ADV Part 2, which can be obtained, at no charge, by calling (866) 216-1920. The principle office of Gordon Asset Management, LLC is located at 1007 Slater Road, Suite 200, Durham, North Carolina, 27703.
Material presented has been derived from sources considered to be reliable, but the accuracy and completeness cannot be guaranteed. The volatility (beta) of an account may be greater or less than the indices. It is not possible to invest directly in these indices. The investment strategy or strategies discussed may not be suitable for all investors. Investors must make their own decisions based on their specific investment objectives and financial circumstances.