S&P 500 – Weekly Chart

By David Morrison  |  18/01/2018 15:24

This article takes a look at a longer-term chart of the S&P500 to see if there’s anything it can tell us about where the index goes from here

Longer-term horizons

When undertaking technical analysis on a market which keeps on posting record highs it’s helpful, or even vital, to pay attention to longer-than-usual time horizons. Often this will be the only way to put current price action into some kind of context. This in turn will help you to make sensible trading decisions.

Notable sell-offs



This becomes apparent when looking at US stock indices, in this instance the S&P 500. Here’s the daily chart going back to October 2015, showing well over two years-worth of price data.  We can see three notable occasions when the index sold off. The first (and by far the most significant) was in early 2016. This was when China devalued its currency for a second time in the space of a few months. The previous occasion was back in August 2015 – a move which threw global markets into chaos, sparking an excessive and panicky response from Chinese regulators to stem an equity market slump and the attempts by domestic investors to move funds offshore.

Quick recoveries

Then we had the knee-jerk sell-off which followed the UK referendum on membership of the European Union. As we know, the result proved to be an unexpected victory for the “Leave” campaign and investors were quick to de-risk and cut their exposure to global equities. But prices snapped back quickly and it wasn’t long before the S&P had made back all its losses and began to consolidate at higher levels.

S&P makes records

Then a few months later there was another political shock after Trump clinched the US presidency in November 2016. Once again, risk assets sold off. But this time the bounce-back was positively indecent in its rapidity. Within hours the S&P had made back all its initial losses. Subsequently it embarked on an unbroken rally which takes us to today. When we refer to the rally as “unbroken” we’re talking about an index which has had 14 consecutive positive months on a total return basis; is within days of enjoying the longest streak without a 5% sell-off since records began; has just posted its best new year performance in over 50 years and where volatility continues to hover near all-time record lows.
 

Trading the chart

But how to trade it? Well, the chart above isn’t particularly helpful as the bull run is without context. So far it’s been enough to put aside any doubts one may have about excessive valuations and the withdrawal of central bank monetary stimulus and just pile in on the long-side. This has worked well for most of the last eight years and every analyst that’s called a top to this market has ended up on the wrong side of this exceptionally powerful bull trend.

Exponential gains

The next chart is a weekly going back ten years, and this helps to add some perspective. It shows us precisely where the S&P500 broke to the upside during its post-2009 rally. We can also get some idea of the recent exponential move higher which has seen the index burst above the resistance line in the Andrews’ Pitchfork study shown below. While it’s absolutely no secret that the S&P is overdue a correction, what this does tell us is that the index looks particularly overbought at current levels. There’s no reason why the index can’t go higher from here, but the probability is that it will need to pull back and consolidate first. Now this is not to suggest that this is a shorting opportunity. Current market sentiment is far too positive for that. But what it does suggest is that now may not be the best time to take out fresh long positions. Certainly, the market can easily go higher from here if investors continue with their bullish exuberance. After all, global economic growth is picking up and Trump’s tax reforms look like they will provide a big boost for US corporations. But nothing goes up in a straight line forever. A bit of patience now may bring a more favourable buying opportunity further down the line. 



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