Weekly Chart Review

Charts and More Charts...

This week, I’m going to do something a little different.

I get requests all the time from readers asking if I have an opinion about which way a particular market, sector, or ETF may move over the short-to-medium term, and whether or not there are any support/resistance levels to keep in mind along the way.

This week’s piece will be a “chart-o-palooza” to address this question.

Please feel free to leave a comment (or email me) letting me know what you think of this format. Maybe it becomes a once-a-month feature?

Part of the reason I wanted to do this now is because if you scroll down to the “Asset Class Review” section, you’ll see that almost every asset we track is “Max Bullish” (except for some of the commodities).

It’s as if the market has already fully priced in the Fed cut in September and absolute certainty of a “no landing” scenario (i.e., no recession).

I continue to stand by the call that I’ve made for several weeks now (i.e., that the US is in a recession - we just won’t know it until we look back later) and I believe what we’re seeing now is the final “blow off top”.

Okay, so let’s say we’re in the “blow off top” stage…how much higher can we go from here? The truthful answer is that no one knows but there are ways we can look at the market to get a better sense for what may or may not happen.

The Process

Let’s start by defining how we’re going to set up the charts and more importantly, how to read/interpret them.

I am going to use three very basic indicators:

• Pivot points

• Trailing stop loss

• Relative Strength Index

Pivot Points:

Investopedia defines a pivot point as:

“A pivot point is a price level calculated from previous prices. It's used to indicate potential areas of support or resistance that offer attractive reward-to-risk setups for trades.”

Pivot points can be calculated for any time frame and the calculated levels remain static until the end of the applicable period.

For instance, if we calculate a monthly pivot point, these levels remain intact until the end of the month. On September 1st, we would recalculate the pivot points for September, and so on.

In the chart below, you’ll see blue, red, and green horizontal lines. These are the pivot points, resistance levels, and support levels, respectively.

• Blue line = the pivot point.

  • If the price is above this line, it is generally considered bullish.

  • If the price is below this line, it is generally considered bearish.

• Red lines = resistance levels.

  • As the name would imply, these are pre-defined levels that may provide “resistance” in allowing the price to move higher.

• Green lines = support levels.

  • As the name would imply, these are pre-defined levels that may provide “support” in keeping the price from moving lower.

In the chart below, and those that follow, I am using two sets of pivot points:

• Monthly Pivot Points - thin lines.

• Quarterly Pivot Points - thick lines.

Trailing Stop Loss:

In the chart below, the trailing stop loss (TSL) is the red or green line that is trailing just above or below the price line.

As the name would imply, this is a level at which one could consider reducing their position once the level is crossed. It is called a “trailing” stop loss because the stop loss automatically moves up as the price moves up (for a long position).

Relative Strength Index:

Investopedia defines relative strength index (RSI) as follows:

“The relative strength index (RSI) is a momentum indicator used in technical analysis. RSI measures the speed and magnitude of a security's recent price changes to evaluate overvalued or undervalued conditions in the price of that security.”

The RSI indicator has been placed below the price chart.

Very simply, if/when the indicator line moves above the red horizontal line, the market (or particular security) is deemed to be “overbought”.

Conversely, if/when the indicator line moves below the green horizontal line, the market (or particular security) is deemed to be “oversold”.

Very important - just because a security is “overbought” or “oversold” on the RSI, does not mean that it is immediately going to turn around and move in the opposite direction.

Securities can (and do) remain “overbought” and/or “oversold” for substantially longer than you would think but they are a good proxy for trying to determine if a move is just beginning or potentially running out of steam.

Putting It All Together - Example

By way of example, in the chart below, I am showing the S&P 500. Let’s talk through how to analyze/interpret this.

First, where is the RSI? In this case, it is toward the top of the range (i.e., very close to the “Overbought” line) but it hasn’t crossed the red horizontal line. This would suggest that the market may still have room to move higher; however, the current move higher could be getting a bit long in the tooth.

Second, let’s assume the RSI is correct and that the market does have more room to run higher. How much higher? Let’s look for any pivot points or resistance levels above the current price. When we do that, we find that there are two sets of lines (monthly and quarterly) that are providing resistance right around 5,672.

This means that the market may move from its current level to ~5,672 with relative ease but it may have some trouble moving above that. It’s also worth noting that this is the same level where the market had trouble moving above back on July 16th, this provides an extra layer of resistance.

With that said, if the market can move up and through the 5,672 level, there isn’t much resistance until you get to 5,806 or an additional 2.4% higher.

Lastly, let’s consider the trailing stop loss. As the name would imply, this is the value where one could consider getting out of the market and/or reducing a position (yellow arrow) but it also provides a good gauge for when to get back in the market (green arrows).

This is a daily chart and my guess is that most long-term investors do not want to deal with making changes with this frequency. In that case, the trailing stop loss can be applied to weekly, monthly, quarterly, etc. charts just as easily.

The Charts

Okay, now that we have that out of the way, let’s dive into all of the charts!

S&P 500 -