One Chart to Rule them ALL

March 9, 2023No Comments


Today, we’re going to just be looking at one chart, and that’s a change.We’re going to call this episode One Chart Shall Rule Them All, and I think you’ll see why I call it that label because it does help us answer some of our questions about the current bear market and where it may stop. We’re going to go right into the chart and this is a chart of the S&P 500 that goes way back in time to around the late twenties.

You can see on the left hand side the outlier rally that went into the market before the crash in 1929, 1930, 1931, all that. You can see the large spike to the downside as well. Now through history, there’s been a bit of a channel. Now, sometimes the market arks off over a period of time and hits the top of the channel, and at times it’s hit the bottom of the channel. Now, if any of you know anything about technical analysis, there’s a little bit of a rule that says if you can get three touches on a line, or approximately three touches, you tend to have some sort of a trend. So that defines the trend, the more touches the merrier. You can see that on the left-hand side of the chart, we definitely got numerous touches on this particular trend line, and you’ve got to draw the trend line at the same angle all the way up so you can’t kind of fudge it so it touches this one.

But you’re looking for the most data within one chart. This gives you the idea of what some people would call regression analysis. That’s a mathematical concept that says that there’s an average return over a period of time, and that can be represented by a trend line that goes through the data and that might be represented by this line here, which is the light pink line. Then you’ve got outliers, meaning a couple of standard deviations from that mean. I didn’t do the mathematics on this as far as two standard deviations, but what I’m clearly showing you is that somewhere along the upper green line here, the market likes to find reason to stop. I talked about this back in 2021. In fact, this exact chart, obviously dated to that point in time, and I was pointing out that we were near the top of this trend channel.

 

I’ve been looking at this trend channel for a long time. Not since 1929, mind you. I’m not that old, but I have been looking at this trend chart for many, many years, in fact, a couple of decades and what I’ve noticed is that you get too close to the bottom, you tend to rally, too close to the top, you tend to fall, and it’s happened over and over again. So where are we right now? Well, let’s talk about that. If we look at the top of this trend channel, you can see that we did hit the top in 2021 and, as I said, I did display this chart on both a video and in blogs back in late 2021.

By the way, I lined up this peak with a long-term rate of change signal that was signaling in 2021 that the market had a very high chance of rounding over. You can look back at my blogs to see if I’m lying. We’ve now had a correction, but if you look at the correction that we’ve had, and this is right up to date as of the fourth, I believe it is today or the third, let me just see. It is the 3rd of March. So this is right up to date as of the 3rd of March in this very, very long term time period. You can see the correction that we’ve had down from the top of that channel is pretty minuscule when compared to other movements over time. I mean even some of the smaller movements when the market would hit the regression line or the mean line, I should say, and pull back.

So my question is, will the market pull back to the mean line as it did here and in the early two thousands? I think it was actually in 2008, if I’m not mistaken. or will it drop below that to approach somewhere near the lower end of the channel as it has many times in the past? So that’s really the question, and that’s why I’m going to call this chart One Chart to Rule Them All because all we know right now is that after hitting the top of the trend channel, the market has corrected, but it really hasn’t corrected in a meaningful way. It has not acted like it has acted over very long periods of time. In fact, my guess is that you might in fact see this median trend channel hit on the S&P 500, and that, by the way, would bring us into the lower 3000 area.

So it’s not a prediction, it’s just a potential based on the way the long-term trend channel looks. I wanted to bring you this as something you should keep in the back of your head when we’re doing our more weekly chart work and we’re looking at trading ideas and something that might work for the next three or six months, that’s great, but the bigger picture may still suggest that there is a little more downside, in fact, perhaps more than just a little more downside, we shall see. So I’ll be back next week. In the meantime, I encourage you that if you have any questions, please post them either to the video notes or even better to my blog, because I pay very close attention to the comments on the blog and I’ll get them answered.

 

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