I stand here conflicted. The chart setup Iām going to discuss today has led to lower prices each time itās occurred since 2007 but seasonality and Fed actions appear to favor the bulls. Before we get into it let me say that this is not some magical chart pattern and like everything in the market, nothing works 100% of the time. Thatās a critical concept to understand when it comes to technical analysisā¦ perfection does not exist. Now that weāve gotten that out of the way, lets talk about the slope of the S&P 500.
On October 18th last year I wrote a post called āWhat The Slope of Equities is Telling Us.ā I showed the chart below andĀ discussed the implications it could have on the equity market. This was right before the short correction we had that bottomed in November and lead to the strong rally thatās lasted essentially all of 2013. The setup Iām talking about is the slope of the S&P 500 ($SPX) on a weekly basis. The slope can be used to measure the strength of a trend by looking at the price action over the last 52 weeks. As the chart shows, when slope falls under its 13-week exponential moving average over the last six years, its lead to drops in equity prices. Going forward Iāll be watching to see if slope strengthens and can get back above its EMA (although that hasnāt been the case for the past four occurrences) or if price starts to follow its slope and heads lower.
But let me say this, I am not using slope to call for a top in the stock market. As you can see, in ā07 and ā09 slope fell under its 13-week EMA a few weeks before a long-term (ā07) and shorter-term (ā09) top was put in. With slope failing to hold above its EMA as of last week, we know that the strength of the trend is degrading.
We must now take this into account with the other information that we have, such as seasonality, breadth, and momentum. Seasonality going into year-end is bullish. Ryan Detrick, theĀ Sr. Technical Strategist at Schaefferās Investment Research has been tweeted about this all month (heās a great follow by the way). Iāve discussed the divergence taking place in momentum in my Weekly Technical Outlook as well as the early warning signs for breadth.
We also canāt forget about the Fed! We get the FOMC announcement this afternoon. Equities are likely to continue taking their cues from the Fed, whether we get the taper announced today or not. No taper would probably be bullish andĀ visa versa. Iām firmly in the camp that we donāt see the taper announced today, but weāll see what happens this afternoon.
Copyright Ā© Andrew Thrasher
