The Battle for the Chart

Published On: June 29, 2016

Written by: Ben Atwater and Matt Malick

Although we don’t trade on technical analysis, we occasionally see something interesting in the market’s chart patterns.  There are many short-term traders that act based on technical analysis, so chart patterns are to some degree a self-fullfilling prophecy.  Furthermore, many hedge funds and other market timers key into specific index levels that charts inspire and conduct programmed buying and selling based on these levels.

The Standard and Poor’s 500 last made an all-time high in May 2015, nearly a year ago.  As you can see from the below chart, since the May 2015 high, the market has found resistance along a downtrend line (red), making lower highs along the way.

But following a quick bounce from the February 11^th lows, the market recently closed above 2,100 to break the downtrend line.  From a chart perspective, this is a good sign – market participants wanted to see the S&P 500 break its downtrend line.

Since then, equities have stalled and fallen back to the downtrend line.  You can observe the day-to-day trading action of the market as a battle right along this line.

In the short-term, if the market can find its way above the line and then break through the May high of 2,131, then bullish program trading could push the market higher.  On the other hand, the opposite could occur if the market can’t consistently close above the downtrend line and if it ultimately fails to take out the May high, in which case short-term traders will turn bearish.

None of this really matters for long-term investors, but it is an interesting phenomenon.  The way the market has been trading reflects a clear obsession with the downtrend line and the May 2015 highs.

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