Jim Cramer featured the technical work of RightView Trading on the “Off The Charts” segment of Mad Money exactly one month ago. Here is a recap of the piece from a follow-up article on TheStreet.com that day.
It was another in a series of “Off the Charts” analyses that we did on the long term direction of the broader market. In this episode we looked at the bearish divergence between the S&P 500 Index, which is heavily weighted with technology stocks, and the Equal-Weighted S&P 500 Index, which gives equal weighting to every stock in the index.
At the time, the S&P Index was breaking above the resistance line of a horizontal channel pattern, while the equal-weighted Index was not. We suggested this was a bearish divergence. That the two indices would have to realign at some point. The higher probability scenario was that the technology stocks were distorting the performance of the S&P 500 index. This would mean that the breakout on the S&P 500 chart was a false breakout and that it would have to revert back in the direction of the equal-weighted chart.
Since then the broad market as represented by any of the index charts has fallen dramatically on both the health issues and economic issues of the coronavirus. All our technical analysis did was point out the fragility of the S&P 500 Index relative to its equal-weighted counterpart at that time. Many other technicians had observed similar technical bearish indications. The fundamental event triggered the drop and has continued to power it lower.
So where is the market headed? As it turns out another chart that we highlighted on “Off The Charts” last year shows that we are at or near another inflection point. The S&P 500 logarithmic chart has returned to a long term rising support line on its monthly time frame. A log chart measures price movement as percentage moves. This support line has been in place for nearly a decade and has been successfully retested multiple times. It is an important level from a technical perspective.
The integrity of this support represents the future of the intermediate term to long term direction of the broader market. If it is broken to the downside a channel pattern price target in the 2038 area would intersect with the 50% Fibonacci retracement level of the 2009 low and the 2020 high. But the 38% retracement level in the 2362 area intersects with the 2018 low. If this level is first tested it should provide substantial support of its own.
The opposite scenario is that if channel support holds then the upper range of the channel would be the technical target. This would represent new highs for the markets. At this point in time that would require some very positive fundamental news. Let’s hope for the best.
This is a big picture long term analysis and should be used as context for shorter term analysis. Also, remember the predictive power of technical analysis comes under stress in volatile fundamentally driven markets.