There are several problems with reading charts, but probably the biggest is that the message from a chart is rarely, if ever, clear-cut. Chart patterns and the conclusions we draw from them are, like beauty, in the eye of the beholder. It took me many years of working in financial markets to understand that. Every time someone graced me with their interpretation of a chart, they sounded so definitive, so certain, that there seemed to be only one way to look at things. Over time though, I came to realize that if you gave two people the same chart and asked them to predict the next move, there was a decent chance that one would say up and the other down.
Take the chart for this recent move, for example. There are two distinct ways of viewing, or rather interpreting, the one-year chart for S&P 500 futures (ES). One suggests that this year, there will be no Santa Clause, or at least no rally named for him, the other indicates that he is on his sleigh and heading our way.
The most obvious is the bear case. After all, the last month and a half have been horrendous, with the index losing around 14% from the Sept. 21 high. There are also technical signals and patterns that reinforce the doom and gloom outlook. Perhaps the most publicized recently has been the ominous sounding “death cross,” which can be seen on the chart above. That is when the 50-day moving average, marked here by an orange line, crosses over the 200-day average, marked in blue. The theory is that the crossover shows that short-term downward momentum is now more powerful than the long-term upward trend, which logically points to continuing to moving lower still.
There are other, less scary-sounding but equally depressing ways to look at the above. There have, for example, been three distinct attempts to rebound after the initial low on Oct. 29, all of which have failed. Each time the achieved high has been a little lower, 2,824.25 on Oct. 17, 2,818 on Nov. 8, and 2,814 on Dec. 3. Each dip, however, established new lows. The bulls, it seems, were getting beaten back earlier and harder on each attempted rally. If that sounds bad, it’s because it usually is.
There are, however, reasons to hope, and isn’t that what Santa Clause is all about? The most obvious thing here is that, for the futures, which include after-hours trading, the 52-week low of 2,529 set in early February has held. Stocks recovered from that low, which was caused by essentially the same things, to march on up to record highs, so we know it can be done.
A short-term chart for this morning’s action so far suggests that that 52-week low will continue to hold. Short-term momentum is definitely shifting and shifting to such an extent that the 5-day, 5-minute chart above shows the opposite of the death cross, a golden cross, in which the short-term moving average crosses above the long-term. As you can see, there have been several tries at that over the last week or so, but until now, each has failed. There are then, ways of looking at the chart that suggest that we are at, or at the very least close to, the bottom.
That is the aforementioned problem with chart-reading. It gives the appearance of being objective, what with being data-based and all, but it is all too easy to find evidence to support any preconception and therefore any argument. There is, however, an even bigger problem with technical analysis.
Technical signals and chart patterns can be very influential in short-term moves, as they affect traders’ behavior. For the kind of long-term move that we are talking about here, though, they fade to irrelevance when met by shifts in the fundamental influences on price. What has really caused this selloff is not some squiggles on a chart or a coincidence of numbers, it is fear. Fear that a combination of higher interest rates, tariffs and a global slowdown, no matter how slight, will negatively affect the U.S. economy next year.
There is some evidence that these things are beginning to hurt, but, as I pointed out last week, the first two are quite easily reversible. Donald Trump has only to accept a deal with China of some kind, and even if that leaves us worse off than before the trade war started, it will be spun as a victory. The market, awash with relief and predisposed to be kind to any Republican president, would probably not sweat the details for now. Similarly, the Fed has only to sound a little more dovish—not actually make any real change—and the bulls will re-emerge and take control.
Perhaps most importantly of all, though, history is on the side of the bulls. Every market decline, no matter how scary at the time, has proven to be temporary. This one will be no exception; stocks are not going to zero.
In this case then, it seems to be the opposite of the Santa Clause story. The argument based on blind faith, and dare I say imagination, is the one being used to justify doom and gloom, while boring old logic, facts, and evidence are what give us hope. For investors, therefore, he may be a bit late in arriving, but it looks like Santa will come this year after all.