It seems we’re always in transition and that it’s more about trends that about what’s meaningful.
For the majority of last week, while reading, viewing, and listening to various market commentaries, a forgotten annual occurrence came flooding back to memory. You’d think after nearly 25 years in the business it’d be something at the forefront of my mind this time of year. Nevertheless, the same question seems to fester in the minds of investors as we enter the fourth quarter: Where are the markets going to end on December 31?
This -- considering the election, economics on the precipice, and QE infinity -- is anyone’s guess.
Accordingly, today I will present our firm’s technical take on how we attempt to ascertain the most probable hypothesis. In doing so we use a date/return slope calculation which is rather simplistic but seemingly accurate when taking into consideration a few assumptions, the first of which is purely a trend or channel assumption.
Otherwise stated, you have to be able to determine the most probable sustainable trend and/or channel that could -- the key word being "could" -- remain until year’s end. The second is assuming said trend/channel is not broken. Realizing these are immense assumptions is rightly the shortcoming of this type of analysis. With that said, I continue.
Today’s graphs -- the Nasdaq 100 Index
(INDEXNASDAQ:NDX) and the S&P 500 Index
(INDEXSP:.INX) -- show the bounding channels of both indices since August of 2011. Starting with the NDX you can plainly see the intermediate-term bull channel, outlined in blue. This has an enormous range of nearly 16% as it vacillates from its lows to highs. Based on its top and bottom values of the time differential, we projected this out until December 31. The analysis, again with the aforementioned assumptions, gives the NDX an ending range from 2,860 to 3,300.
Click to enlarge
The SPX, on the other hand, has less of a slope and a somewhat smaller range. The range of this channel, again from August of 2011, is approximately 12%. By using the same time/return calculation we project a 1,425 to 1,590 end range for year end.
Click to enlarge
This type of analysis can be somewhat vague when attempting to pinpoint the target rather than determine a range. This is primarily due to the massive volatility of the recent (~1-year) channels. Yet at the same time the high end targets equate to our previous editorials when evaluating the next likely long-term resistance points. (It is always advantageous to apply a multitude of techniques to confirm or deny one’s principal analysis; the more the better.)
Due to the slight ambiguity of the research presented, technicians should follow this with internal channel scrutiny not only to confirm its longevity, but to become more specific. This can be done with the understanding that channels typically have one or multiple internal parallel trends which equate to the outside barrier. When scrutinizing the smaller inner trends, clarity of overall strength arises. Again starting with the NDX, we have not only outlined the intermediate-term channel (blue) with the smaller internal trends parallel to the overall trend with light blue dashes, but we also outlined the smaller countertrend areas in red and smaller bull cycles with black dashes.
Click to enlarge
Without overcomplicating the analysis, the interior inspection provides the ability to establish strength and probability of continuation. As for this chart, potential weakness is beginning to arise with the break of the latest internal bull trend (black dash). Conversely, it is still holding the internal parallel trend (blue dash). If this were to break in succession, the technical likelihood would be a return to the bottom of the intermediate-term (~2,650).
The SPX channel analysis is similar in nature when evaluating direction and internal (parallel) health. Conversely, it has yet to break the inner, steeper sloped bull trend (black). A break of either of these lines (~1,400 – 1,425), akin to the NDX analysis, would return the index to the bottom side of the intermediate trend (~1,350).
Click to enlarge
I hope this helps and finds you well.
Editor's Note: Read more at Tesseract Asset Management.
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