As early as the Dutch Tulip Bubble of 1637, markets of all types have traced out repeating price patterns based on trading psychology and human nature. As a technical analyst I look for these chart formations, typically over a six-month period and using daily prices, to filter out “news noise” and help guide my movements. Head-and-shoulders, double top, triple top, wedge, cup-with-handle and channels are common chart patterns.
Last week, as the Dow Industrial Average crossed the 16,000 threshold for the first time, the S&P 500 chart above circulated in financial media circles. It compares the S&P 500’s behavior over the past two years with the benchmark’s price movements during the late 1920s leading to the Crash of 1929. A little unnerving, isn’t it? But before you head for the exit door, take a look at the chart to the right from an analyst at institutional trading firm Miller Tabak that offers a different perspective of the same data. Miller Tabak’s chart overlays the S&P 500’s actual percentage moves during both periods.
Still, it’s never wise to be complacent. The run-up from the March 2009 low has now lasted 2.5x longer and returned 2x more than the average cyclical bull market. We’ve also seen how traders run for the exit doors every time the specter of Fed tapering is raised, serving as a constant reminder of how fragile this bull market will be when the Fed removes the punch bowl. A related read from Sunday’s USA Today: Why does Wall Street fear Fed’s taper plan?
♦ Please note that my readings will change without notice, so please don’t buy or sell solely based on anything you read in this blog. ♦