3 technical analysis methods applied on S&P500

In January 2020, the markets were in "higher! higher! mode" with no end in sight. Endless growth seemed to be the case. Is there ANYTHING that can bring this very high market down? It did not seem like it. Then came Corona. With first reports coming in from China in January, we ignored it as something far away. Something that does not affect us.

With Italy being hit hard, locking down entire provinces, and the virus spreading rapidly, people got aware of the extent of this soon to be global pandemic. The market reaction was huge, sending the S&P 500 down a whopping 35% in as little as a month.

But was the crash really happening so unexpectedly? People always "felt" that the market was too high and you can see that they were right when looking at the major RSI divergences of the past 40 years. A divergence is not limited to a certain time span and sometimes can grow very large. But the larger the divergence, the deeper the market correction:

In terms of price targets, I do not speculate where the market is going, as technical analysis does not predict the future. But it helps you to be on the right side of the market! There are various tools (Fibonacci, Gann), some more accurate than others, and models which give you an idea about possible price targets. Market geometry is the key and there are some outstanding people out there having done impressive market research.

To keep it simple, I will demonstrate 3 basic principles of technical analysis which have proven to be reliable (backtest 1875-2020!) and which help you to stay on the right side of the market.

1. Moving Averages Crossover

The next chart is on a monthly basis. Every bar represents one month. So this is not useful for short-term speculation, but rather giving long-term signals. In both cases, the 2000 internet bubble as well as the 2008 financial crisis, this approach has provided reliable signals. While it may have missed the absolute top, it has not created any signal all along the way down. So how does it look like in the current market?

Unfortunately, the answer is "short". While you see some whipsaws in sideways markets, these signals tend to be very reliable at the end of a long uptrend. Giving the huge amplitude of the March bar, markets would have to go significantly higher over the next few month to reverse the signal to "long" again. Given the fact of the current Corona-impact, I fail to see any reason for this scenario.

S&P 500 signal: short

2. Ichimoku Cloud

To keep this complex approach simple, I reduce this Japanese approach and only use the "cloud". For those who are not familiar with it: if the price crosses through the cloud to the upside, it defines the market to be in an uptrend and will create a "long" signal and vice versa.

Again, this approach has provided reliable signals both 2000 and 2008. While creating little "false" signals, they were reversed very quickly thereafter:

In today's market, the S&P 500 has broken through the cloud, leaving the cloud levels very high. The S&P 500 would have to gain 8.7% just to reach the lower end of the cloud, and 14.2% to break out through the current upper limit of the cloud.

S&P 500 signal: short

3. Trailing Chandelier Stop

My favorite approach! Completely mechanical following rules only and ignoring any emotion! As it incorporates volatility, it adapts to market behavior. Again, while not giving perfect signals on a monthly basis, once it happens, it is usually quite significant. If investors had followed this approach in 2000 and 2008, they would have saved a lot of money on the way down...

In this "ever lasting" bull market 2009-2020 that we were in, it has only created one "short" signal in 2011 - the year Fukushima shocked the world. But as the world realized the impact on the rest of the financial world was not so big, markets turned up quickly again and continued their way up. In all those years thereafter, this approach has never created a signal to go short - until now.

Using this approach, the S&P 500 would have to edge higher by roughly 11% - on a monthly basis and keep this level for another month to confirm the signal. Currently, no reason is in sight why this should happen.

S&P 500 signal: short

Many investors believe that current market levels already price in all the action. Don't forget:

• first quarter results just released take only one month (March) of Corona action into account
• the entire impact on the economy is yet to be felt
• despite the wish of all individuals to get back to "before", demand for goods will not rise again as fast as it has fallen due to its limitation by Corona restrictions
• the recent price development of the oil price and you will have an idea of global demand.

Here is a good chart showing where we are: United Continental Airlines, just like global aviation, is hit hard by the 90%+ grounding of their fleet. The stock acted accordingly. To reach pre-crisis levels, the stock would have to soar up to the 90-100$ range. Given all the global travel restrictions, this is not going to happen any time soon. In this "new normal" world, travel will start at some point again, but at very low and slow levels.

Try not to predict the market, simply stay on the right side of it! A common mistake is to interprete a short-signal as a confirmation of a long-term correction. A Corona vaccination or Corona therapy would be a game changer and shape up the market again! Remember, there are always opportunities out there.

While investing in those pharmaceutical companies is associated with volatility and high risk, going long in battered stocks like UAL will pay off once the market signals are going long again. Don't miss the re-entry once the time has come. All of these 3 approaches will give you a good idea when this will be.