Simple technical analysis of S&P 500

S&P 500
Yahoo Finance

I am actually a fundamental analyst by professional. However, due to my curious nature I studied a number of books on technical analysis. Part of the reason is definitely Jack D. Schwager’s immensely popular “Market Wizards” book series. I will of course have a writeup on the best technical analysis books that I read. Meanwhile, here is a small analysis on the S&P 500 using basic common sense.

There is a clear up trend which is still intact

The grey line touching the low points show that the S&P 500 is still in a mid-term uptrend. Since this is not broken we can say that the rally is still intact.

1,850 seems to act as a major resistance

In early January S&P 500 failed to cross the 1,850 level twice. Every time it reached that level there was sell pressure causing it to come down. This in technical term is called a double top (a bearish pattern).

Interestingly, after a strong down move we saw an equally strong recovery and the index is up to its resistance level of 1,850 again. This is a critical moment because if it can break through this barrier with decent volume we can expect it to move up a bit. On the other hand if it fails a third time to break this point then we do have a bit of a problem and we can consider that a triple top (more bearish than double top) has formed.

Ascending triangle pattern has formed

If we combine the up-trend line and the resistance line we see that an ascending triangle pattern has formed which is typically considered bullish. However, we can’t confirm anything until there is a breakout to the top or the bottom.

Recommendation

I would recommend doing a wait and see before taking a position. If the index breaks out to the top then a long position is justified. For people holding a position on the long side already, the daily candle patterns need to be observed closely and if the index starts retracing downwards the position can be closed or reversed (take a short).

Disclosure: I have no exposure on S&P 500 and in fact never traded it in my entire life.

Asif Khan, CFA

Asif Khan is presently a Research Analyst (Financial Sector) for Exotix which is a frontier market focused investment bank. He has more than 6 years of work experience as equity analyst in both buy and sell side roles across Asian frontier markets. Asif is a CFA Charterholder and has a dual major in Finance & Economics from North South University.

5 thoughts on “Simple technical analysis of S&P 500

  1. I think the fact that the market quickly recovered from a mini correction earlier this year, and reached record highs shows that there is still some amount of conviction. But what’s lacking is some sort of a strong catalyst. The appointment of Janet Yellen couldn’t yield any change because people say she’s just like Bernanke. The economy has performed below expectations with the unemployment at unflattering levels. The emerging markets now have problems of their own. Many analysts now say that a crash is imminent but thankfully, Warren Buffett recently said that stocks are in a zone of reasonableness. Also, in my view, there are some companies which are trading at significant discounts to their intrinsic value and the prospects of record breaking corporate profits is very much feasible. So in the short term, say 1-1½ years, I reckon the market will do fairly well.

    I just have one question, why did you choose to do the technical analysis on the S&P500? Why not Dow Jones or NASDAQ?

    1. People are discounting the cold weather effects on economy. Whether economy is slowing down or not will be shown in March and April indicators as cold will go away by that time.

      1. I tried doing this same analysis on Dow Jones and NASDAQ, but the patterns are not so regular. I was probably doing something wrong. But interestingly, I found a strong support for IBM at $172.

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