Ladies and gentleman: we have a break out.
And it looks like this:
This a 1-month candlestick chart of the S&P 500. Each glyph represents one day’s action, and the glyphs are called candlesticks because, well, they look like candlesticks. At least the long ones do…
I take a very simple approach to analyzing the daily price action for an index or a stock. The important factors are trend, support and resistance. And while this chart of the S&P 500 index includes volume bars along the bottom, volume isn’t as significant for an index as it is for an individual stock. As you can easily see, the trading volume for the index doesn’t really vary that much from day to day.
The trend lines on this chart serve double duty: in a general sense trend lines show us which direction price is moving, the trend. The black line at the bottom is the 200-day Moving Average and it defines the long-term trend. Price is above it, so the trend is up…
The 200-day MA looks pretty irrelevant on the 1-month chart, because it’s so far below the daily price action. But if we zoom out to a 1-year, it’s much easier to see the significance of the 200-day MA…
The S&P 500 was below the 200-day MA (black line) for all of 2022. It finally broke above it in January of this year. And in fact, I discussed this trend change back on January 16.
The S&P 500 signaled a trend change back to the downside in early March, when the regional bank crisis emerged. Swift action from the Fed and Treasury cut that crisis short, the S&P 500 recovered the 200-day MA by the end of March and the trend has been higher ever since.
Now, you can see how the 200-day MA acted as important resistance in August and December 2022. Put simply, resistance is a price level where traders sell – taking profits and initiating short sales. It’s pretty obvious what happens when there are more sellers than buyers…
A Simple Plan
Probably the most basic market timing buy/sell strategy is to buy stocks when the S&P 500 breaks over the 200-day MA and sell stocks when the index breaks below that long-term trendline.
Of course, the long term trend doesn’t change very often. And so a trading strategy using only the 200-day MA isn’t going to generate very many actionable signals. Which is fine for long-term investors. But active investors and traders usually want more action, which can be had by using the 50-day Moving Average (purple line) for signals.
On the first chart, the 1-month chart, we can see that the S&P 500 approached the 50-day MA twice in the last month – on March 26 and April 4. Each time, the index found support there, ie, buyers stepped in to “support” prices. The March 26 signal reversed pretty quick. But the April 4 signal was powerful and would’ve had you long for the last 6 weeks, capturing a ~4% move for the index and who-o-o-le lot more with some individual stocks.
Zoom out to the 1-year chart and you can see that a trading strategy using the 50-day Moving Average will produce many more buy/sell signals, and most of them are pretty reliable and resulted in nice multi-week moves.
Now of course – no trading strategy works every single time. (Anyone that tells you otherwise is pulling your leg and probably trying to pull some money out of your wallet, too.)
Using trendlines and support/resistance points is very much a horseshoes and hand-grenades activity – getting close can absolutely count…
The more you narrow the time frame, the more trading signals you get. And that’s what we were looking at this past Monday, May 15.
The 1-month S&P 500 chart at the beginning of this article is the updated version of the 3-month chart we looked at on Monday. The red, angled lines in the chart above are unchanged from Monday’s chart, though I did add initials to indicate each day of this week. And yes, I know the “M, T, W, Th, and F” I drew on the chart above are not going to win me any awards for penmanship or whatever you call it when you use a laptop mouse pad to write letters or words.
I want to quickly address my use of Yahoo Finance charts. I know a lot of traders, many of whom run subscription trading services for stocks and options. And the vast majority pay their own subscription fees for charts from companies like Stockcharts.com or Trendspider.com or whatever.
And I can tell you – many of them make fun of me for using such an unsophisticated source for my charts – I have no street cred at all. The implication is clear: if you don’t pay for fancy charts and use complicated jargon and all kinds of arcane indicators, you obviously don’t know what you’re doing.
That’s complete BS.
There are a lot of traders out there running subscription services that try to baffle you with their bullshit, like they are gatekeepers of the mysteries of technical analysis.
But the simple fact is that simple is good. Get to know trendlines and the concept of support and resistance and you’ll do just fine with Yahoo! Finance charts.
Anyway. Let’s get back to Monday…
The angled red lines show how the action has played out over the last couple weeks. The S&P 500 has been unable to break above that top red line, creating a series of lower highs that conform nicely to the downward slope of that line.
In terms of support, the S&P 500 has found it around 4,100 over the last few sessions. And now, the rising red trend line is hitting 4,100 today.
Technical analysis will tell you that what we are seeing is a pennant formation – and we can expect the daily action to be contained within the upper and lower bounds of the pennant, until the range between the upper and lower boundaries gets so tight the price action breaks outside of the boundaries…
A pennant formation tells us that the market is indecisive. The bulls do not have enough conviction to take prices higher, and the bears don’t have enough conviction to take prices lower. It’s a standoff.
And the thing is – it’s impossible to predict which way the market will break out of a pennant with any degree of certainty.
I also told you that I thought the S&P 500 would break to the downside out of the pennant. It didn’t. The S&P 500 broke out of the pennant to the upside. And that’s why it’s a cardinal rule with technical analysis that you never anticipate a timing signal.
The S&P 500 has now broken above resistance at 4,165. It is challenging resistance at 4,200, and could make a run at the 52-week at 4,300.
Now lemme show you a trade I think is setting up…
Here’s the 3-month chart for Canadian Solar (NASDAQ: CSIQ)…
The stock can make some pretty wild moves, and I think the ticker symbol is apt – CSIQ = SeaSick.
I tweeted about this yesterday, but look at what the stock did over the last couple days. Two days ago, it blasted higher through both its 200-day and 50-day moving averages. Then yesterday, it dropped $3 on the open, slicing down through both of those moving averages, reversed, drove back up through them and finished the day with another nice gain.
Now, I’ve drawn 3 horizontal red lines to define the recent action. The bottom line shows support at $35. The top line shows resistance at $42.80 or so.The middle line at $39 is a lesser support/resistance line around which the price has pivoted.
Now the 52-week high for CSIQ is $47.69. The low is around $27. The stock price is just a bit above the middle of its 52-week range. Pretty much inconclusive. But check out those last three green volume bars at the bottom of the chart…
The last time buying pressure jumped like that was the first week of January, 2023, and the stock ran from $32 to nearly $44 in 4 days. A similar move would challenge those 52-week highs up around $47.
Best Bet: the stock drops to the middle support/resistance point at $39 then reverses higher. Buying calls with the stock at $39 should profit nicely.
Frustration Bet: this one of those “horseshoes and hand grenades” moves where the stock doesn’t move all the way to support at $39 and instead, rallies from a seemingly random spot on the chart, never flashes a solid buy signal and frustrates us all.
Whichever move happens, I’m not doing anything with SeaSick today. It’s Friday, and I’m ready to call it a week. We’ll pick up the action with Canadian Solar on Monday, when, with any luck, the stock is opening lower, around $39…
So take care, have a great weekend, and I’ll talk to you on Monday.
Chief Investment Strategist
Pro Trader Today