Seeing the Big Trend
I'm a big fan of Impressionist painting. When you examine the brush strokes up close, the individual strokes don't form a coherent image, but rather appear like vivid characters battling for attention. But when you step back a few paces, the bigger picture becomes more clear, and individual strokes give way to the artist's intention. It's the same way with price action: when we're involved in the heat of the daily battle, we can often miss the bigger picture. Today we step back, by looking at the monthly charts on the three major indexes below:
One of the easiest ways to determine the bigger trend in the markets is to put down your daily and intraday charts, and instead look at the monthly charts on the major indexes. In the chart links below, I have plotted my 20-month Acceleration Bands around the simple 20-month moving average for the Dow Industrials, S&P 500 and Nasdaq Composite (the middle trendline in black). A 10-month moving average would be similar to the often-mentioned 200-day moving average (since there are roughly 20 trading days in each month), while a 20-month moving average equates to a 400-day moving average.
What you notice from this bigger picture overview is that the current situation in the markets appears to be the mirror image of the trend in the 1990's. We are now seeing a test from below running into the downsloped 20-month moving averages, whereas in the 1990's we had tests from above the upsloped 20-month trendlines. Just as those tests in the 1990's served as important support, now the 20-month average is likely to hold as resistance. As a general rule, once we see 2 monthly closes in a row above or below this 20-month trendline, this signifies a change in trend.
Currently only the Nasdaq Composite has had one close above this trendline at the end of May, so the end of June will prove critical for the Nasdaq market. Obviously the leadership in the short term has been in the Nasdaq, and the monthly chart shows that there is heavy resistance overhead around 1700. But notice how one close above the trendline appears to be similar in reverse to what happened in 1998, when we saw one close below the 20-month trendline at the end of August 1998, which was followed by intramonth lower lows in September and October, but in both cases these bars closed back above their 20-month. This could suggest that we could test above the May high of 1599.92 this month, but we should not close over 1600 at the end of June. If we do that could be the sign of new bullish leadership. but until then, I have to side with the historical implications that this is still a bounce within a still-downsloping trend.
Nasdaq Composite 20-Month Moving Average
The S&P 500 Index ($INX in the Big Trends Charts) shows the cleanest example of current resistance versus former support. The retest in 1998 was cleanly held in place at the 20-month support line, and now the 20-month line offer major overhead resistance around 980. Given the prior breakdown in this region, from two major support points around 955, in this context the current break over 955 looks like nothing more than a likely fakeout ahead of a coming decline off major resistance at the 20-month average. Time will tell, but for now the risk of another drop appears much greater than better on the start of a new bull run when we are retesting this clear resistance level.
S&P 500 20-Month Moving Average
The Dow Jones Industrial Average remains the weak sister on this latest market upleg, though the recent intraday test at 9000 managed to catch the 20-month trendline as major resistance also. Those who are arguing that the Dow has to catch up with further gains are missing the bigger picture here, which says that this index will have to overcome not only the psychological difficulty of 9000 but more importantly the technical resistance of the 20-month average occurring at this critical intersection.
Dow Jones Industrial Average 20-Month Moving Average |
