QVM Market Notes: 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.


Chart 1 is a daily chart showing that we have been in a trading range from 2600 to 2800 for over a year, with a  breakout UP and a  breakout DOWN, with a return to the trading range.  There have been more “tops” (shown as red elipses) than “bottoms” (shown as green elipses) which suggests there may be more in the way of short-term ceiling (“resistance”) around 2800 than there is a short-term floor (“support”) around 2600. 

There is a tendency for prices to bounce down from resistance and bounce up from support, until the market makes up its mind about trend direction. Typically, once pierced former resistance becomes new support; and once pierced former support becomes new resistance – both of these tendencies failed in this case, as the market was unable to decide to continue the nascent breakouts.  We are in a period of wide range consolidation.  At the end of a long period of consolidation, there is a tendency for strong directional moves continuing or reversing a former trend.


Chart 2 is a daily “box chart” to filter out noise in price movements.  The chart does not have a linear timeline, but rather only plots a new box when the price moves by more than the average move of the last 14 market days. It simply shows the trading range, tops, bottoms and breakouts more clearly than the noisy daily Chart 1.

Chart 3:

Chart 3 is a repeat of the daily “box chart” but used to identify a different pattern, called a “head and shoulders formation”. 

Head and shoulders refers to a top followed by a shallow dip, followed by a significantly higher top, followed by a significant decline, followed by a lower top; as indicated by the circled areas in the chart.   The line drawn under the bottoms is called the neckline.  When found this pattern tends to be a sign of a major trend top.  If the price after the right shoulder drops below the neckline, it tends to go as far below the neckline as the head is above the neckline. 

We can see that in Chart 3. The price did go below the neckline, and it did go about as far below the neckline as the head is above, then it began its strong January recovery; negating the implications of the apparent head and shoulders.

Chart 4:

Chart 4 is another repeat of the daily “box chart” with a “Russian Doll” view (a doll within a doll – a pattern within a pattern).  Could it be that the current run-up is merely plotting out the beginning of the right shoulder of a wider head and shoulders pattern?  Don’t know, but we should find out pretty soon.  If it is a larger head and shoulders, that would be a bad sign.  If the breakout continues up to about 2900, then like the Etch-a-Sketch toy of our childhoods, all the former patterns are effectively erased from a prediction perspective – then they don’t matter anymore.

Chart 5:

Chart 5 is a standard daily chart with 7 indicators plotted upon it, to see if they confirm, disagree with or portend price action.

Moving Average:  This chart shows the 200-day average (the thin dashed line in the middle of the green shaded area) to be nearly flat, slightly up, after a recent dip (not Bearish, not Bullish, just Neutral)

Standard Deviation:  The outer boundaries of the green shaded area mark a 1 standard deviation distance from the 200-day average.  About 67% of the time you would expect the price to be between those two boundaries, as it is now – normal.  The outer boundaries of the beige shaded area are 2 standard deviations.   About 96% of the time you would expect the price to be between those boundaries.  To be outside of them, there should be a strong justification, or a reversion back toward the mean (the 200-day average) would be expected.

Percentage Change: The red dashed vertical line shows that we essentially already had the Bear we have all been looking for (a mini-Bear at just down 20%, but it did happen). It was very quick, so probably did not clear out all of the weak hands. The average Bear takes about 1.5 years to reach its bottom, and then 3+ years to regain the former peak.  This one happened so fast that it probably did not flush out all of the investors who would run away in a typical deeper Bear building over a longer period.  That probably means there are remaining weak hands to be concerned about.

Advance/Decline Percentage: The first panel below the price chart is the Advance/Decline Percentage.  AD Percent = (Advances Less Declines) / Total Issues. 

It shows that when the percentage is down to about -90% (a 90% down day)  by hitting the bottom blue horizontal line, a bottom is near or at hand, and that a strong up day is likely to follow.  That happened clearly at the end of December with a 90% up day following the 90% down day.  It also gave clues to the weakening of the most recent rise as it approached the current downturn.

Percent of Constituents Above Moving Averages: The second panel below the price chart plots the percentage of the S&P 500 constituents that are above their 200-day average in blue and the percentage above their 20-day average in dashed red.

Levels below 30% (the lower blue horizontal line) suggest oversold conditions and the probability of an increase in buying.  The indicators strongly suggested a bottom in late December, and shows the recent overbought condition (plots above 70%, the upper blue horizontal line) to be fading, which is consistent with the current dip in the price.

Money Flow Index: The third panel below the price panel is the Money Flow Index.  It measures the amount of money traded in the security on positive days versus the amount of money flowing through the security on negative days over a selected period of time (in this case 14 days).  Levels below 20 are considered oversold (and due for an upward turn), and levels over 80 are considered overbought (and vulnerable to a downward turn, although overbought conditions may last longer than oversold conditions).  The direction of movement of the indicator is instructive, and crossing the 50 level might be considered transitioning between positive and negative condition.

Money Flow was oversold at the December bottom, flirted with overbought in January, and has been losing steam in February, crossing below 50 yesterday.   Overall, it suggests more downward movement for a while.  Basically this confirms the current dip.

MACD: The bottom panel is the popular MACD (Moving Average Convergence/Divergence oscillator) short-term indicator. It tracks the positions of short-term moving averages relative to each other.  When the shorter rise above the longer, that is positive, and when the shorter falls below the longer that is negative.   We show it here as a histogram.

It reached its peak in mid-January, declined steadily and went negative on February 28, and continues to become more negative – also indicating more probable downward movement in the S&P 500 in the short-term.

Chart 6:

Chart 6 is a quarterly chart of the S&P 500 since its inception in 1957 (241 quarters) along with the 1-quarter rate of change of the S&P 500 price.  The 2018 Q4 decline was 13.97%.  That level or worse noted by the dashed red horizontal line has occurred only 10 times in 241 quarters, which makes it unusual.  The vertical blue lines helps show where in the index price history those strongly negative quarters occurred.  They tended to occur at bottoms, which is an encouraging sign for intermediate-term potential for the index.

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