The S&P 500 – Old school chart patterns

I’m intrigued by the recent congestion in S&P 500 prices.  Up and down it goes.  Here’s a chart of the past 6 months-ish:

Mirror, mirror on the wall... Source: thinkorswim by TDAmeritrade

Mirror, mirror on the wall… Source: thinkorswim by TDAmeritrade

Unlike the relative smoothness of trends in the past, we’re now in an undecided market.  According to (very) traditional technical analysis, I reckon this could be a sign of multiple chart patterns:

  1. Head and shoulders top: see here.  The recent run-up might negate, but still seems to signal further downward move.
  2. Double top: here.  Is 2060 on /ES the top, and we’re on our way back down?  Or maybe we need another run to 2080 to verify the old top, before heading back down?
  3. Triple top: here.  Maybe we can say the runs to 2060 are just 2 more tops added to the 2080?  In which case reversal time?
  4. Falling wedge: here.  Perhaps we’re seeing the high/low runs compressing in a falling wedge, indicating a possible upside breakout?

So many people sign up to newsletters (some of which are very exclusive (read: expensive)) which purport to have amazing chart pattern analysis.  Others buy expensive chart pattern software.  I’m clearly a dunce, as I can’t figure out whether one pattern is better than another in the case of the S&P today.  Assuming complete ignorance, I could equally weight the above observations and come out on the side of a continued fall in S&P prices.  I place roughly 50% confidence in my assertion – so less than the weather forecasters who predicted at least 2 feet of snow in NYC yesterday.

In sum: back to the drawing board.  Not literally – probably won’t use hand-drawn lines to guide my trading anytime soon.

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Hold on there, Baba Looey…

What a ride in the equity markets recently: up and down > 1% daily.  ‘Correction’ is the term being thrown around.

A couple observations:

  • We’ve had a really good run in markets for a long time.  One of my favourite charts is the distance below peak, or drawdown profile, of the S&P 500: at a glance, we can notice both how bad 2008 was (S&P was around 55% below peak at one point) and how good recent years have been (staying within 5% of peak).  It’s almost like the 1990s again – just steady upward movement.  Looking since 1950, though, we see that 1990s, as well as these few years, are the aberration: we should be seeing much more downside volatility in the stock market.
    S&P 500 Drawdown profile.  we've had it pretty lucky for a while now...  Source: Yahoo Finance via Quandl.com

    S&P 500 Drawdown profile. we’ve had it pretty lucky for a while now… Source: Yahoo Finance via Quandl.com

    asdf

  • The sell-off recently finally gives a reasonable entry point for regularly-saving investors.  You know, the ones who sock away a few $$ each month as part of a regular savings plan (a good idea, by the way).  Articles such as this point to an interesting dichotomy: fundamentals (e.g. steadily growing economy, low expectations for earnings) are disagreeing with technicals in a way which may favour long-term investors.  That is, the short-term guys may be dumping shares due to moving averages, while long-term guys can pick up some decent value.

PS – The title is Quick Draw McGraw’s catch-phrase.  Sadly, Saturday morning cartoons are now a thing of the past