Chart above courtesy of StockCharts.com
Blue Line Investing, Article 4 of 12
In our previous article we explored some of the benefits of using Daily charts to view how attractive or unattractive the S&P 500 Index (S&P) may appear in the short-term. In this article we will explore what can be observed when looking at the same investment in the intermediate-term from the Weekly perspective.
When viewing a Weekly chart there are 2 things to keep in mind. First, it represents a broader picture of what may be happening with an investment, at least from a technical perspective. Second, the rate of change is slower, so even if you believe a technical formation is in the process of forming you must be patient for the market to bring it to completion. You should not make investment decisions based on what you think is going to happen – you must wait until the market confirms it is happening.
In the previous article, we identified the Head and Shoulders (H&S) technical formation and how that typically suggests a change in trend to the downside. When looking at the Weekly chart above, we want to look for evidence that supports or invalidates how significant that H&S formation may be. Specifically, could it be warning of a major price top or just a short-term price correction?
The chart above represents the past 2 years of price behavior of the S&P. The blue dashed line labeled “Support” identifies where buyers have overwhelmed sellers and prices have “bounced” at that price level. The red dashed line labeled “Resistance” identifies where sellers have overwhelmed buyers and prices have “turned down” at that price level – until recently. In early July there was a “Breakout” through resistance. The next expectation was for the market to “Test” the breakout. So interestingly enough, when the market formed the Head-and-Shoulders it turned down and effectively “tested” the breakout around the 2,125 price level. That’s the good news. The potentially bad news is the market has not rallied strongly to the upside.
So how can observing this help you with your investment decisions? First, as we wrote in our previous article, if you are looking to make new purchases you may want to wait to observe if the “test” is confirmed. If so, it might provide you with a greater level of confidence that your decision to take risk may be rewarded – at least in the short-term. Second, if you are currently fully invested and price breaks down through the 2,100 price level, you may consider adding some protective hedges in attempt to help protect against what could become further price decline. Finally, aggressive investors could attempt to profit from any price decline by using Inverse Exchange-Traded Funds or other similar types of investments.
In our next article we will explore the S&P from the longer-term or Monthly perspective.
Disclaimer:
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.
Past perfrmance is not indicative of future results. This material is intended for educational purposes only and is not financial advice or an offer to buy or sell any product. The investment strategy discussed may not be suitable for all investors. Investors must make their own decisions based on their specific investment objectives and financial circumstances. The opinions expressed are those of Blue Line Investing and are not necessarily those of Gordon Asset Management, LLC 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. 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.
The S&P 500 Index is the Standard & Poor’s Composite Index of 500 stocks and is one of the most commonly followed equity indices. The volatility (beta) of an account may be greater or less than the index. It is not possible to invest directly in this index.
