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Charting optimism in an index

This blog looks at charting small to big, which is a backwards way of doing things but can provide insights at times. In this case, there is a chance that if the SPY ETF (tracking the S&P 500 index) can clear 418.3 then a run towards 429.6 and higher should follow.

The chart below is the 10-minute chart of the SPY ETF, tracking the S&P 500, from 08 February 2023. Activity on Tuesday (07 February) was a bit odd, with the index jumping higher at one point and then falling hard but then rising to close near the daily high. Fed Chair Powell was talking of course, and his comments on having to potentially raise rates higher than the market expected if the jobs market remains strong were no doubt moving things around. The last 10-minute candle study of the day was a potential warning signal of a drop to follow, which was seen in early trading (gap break lower) on Wednesday 08 February 2023.

The chart below is the daily candle study of SPY. The Fibonacci retracement study from the all-time high to the 2022 low shows that the 50% retracement is being challenged now, and a push to the 61.8% retracement near 429.6 is open after this. The push above the purple and red lines – not as randomly drawn as you may suspect, is bullish. The big near term barrier to watch is the high from last week near 418.3. A close above this may ‘let slip the dogs of war’ and see bears cover positions relatively sharply, and fund managers wary of topping up in the face of the 2022 slap, think about having to chase the market higher, in the face of a pretty big ‘wall of worry’. The reverse is also true of course, failure to break above resistance levels on a sustained basis may leave the SPY in a choppy range, or set to break lower.

The chart below is the monthly SPY chart on a semi-log basis. This means that the price axis is on a logarithmic basis in order to plot the SPY ETF percentage moves, as a 10 point move when the price is below $100 is different in percentage terms from a 10 point move when the price is above $400. Back in late 2021 we gave a series of webinars in which we noted that the US stock market was the big outperformer since the global financial crisis (credit crunch) of 2007-2009, and in fact the bottom of the rising channel was so far away that in order to break it the market would need to really collapse. This is still the case, as the pullback in 2022, while shockingly large, is a mid-channel correction on a long-term view.

Another way of looking at channels can be to draw interior ones. You are unlikely to find this in any chart book, and when I first started using them and showed them to colleagues in the early 1990’s some of my technical analyst team were not happy with this idea. The reason that I gave then, and still give now, for using them is that price action is composed of many layers of activity, traditional charting plots the extremes, but real trading and investment signals often happen at less extreme points. The red channel below captures what I believe to be the most important activity for investors, the meat of the upswing. The fact that the 2022 low was near the lower support line of the interior channel is interesting, but not really conclusive as a ‘base’, yet.

Keywords: technical analysis, stock market analysis


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