“The trend is your friend except at the end where it bends.” The venerable stock and futures trader Jack Schwager penned that in a 1996 book not so uniquely titled Technical Analysis. I don’t know that he was the first to say it, but he put it in writing so he gets the credit.
It is one of the more sensible statements about investing that I have ever read. It is also one of the more complicated. A lot of people leave out the “except where it bends” part. That’s where the complication comes. I’ll try to explain.
There are all kinds of trends. Some can be very good, like when you are eleven and you and your friend are riding Honda 80s on a dirt road near your buddy’s house. Then your buddy suggests that you go a little farther away from the boundaries your parents set up. Enthusiastically agreeing creates the bend. The bend changes to a different trend as you ride your little motorcycle eight miles down county maintained highways and country dirt roads before turning around and stopping at your buddy’s grand-dad’s for gas and water. For some reason you never consider that your buddy’s grandfather will call your parents who surprisingly are waiting when you return from your trip. They explain that the bend you made was big, created a downtrend and that you will no longer ride motorcycles and have to perform chores that previously did not exist.
Or a trend can be playing army with your same buddy in a pasture. It is a fun game, but the game stops when you suggest that it is a good idea to try and tip a young bull, while he’s awake. For those of you not familiar with “tipping” it is the act of running into a standing, sleeping cow and knocking her over. I have never seen it work. Trying this on an alert young bull is a really bad idea. When the young bull sees you coming and decides to turn the tables and chase you instead, that becomes a big bend that changes a good time trend into a bad trend. If you are fortunate, it ends with you and your buddy stuck in separate apple trees waiting a couple of hours for your dad to come home and shoo away the young bull who has been pawing the ground beneath you.
Investment trends and their bends sometimes occur that way. However, for the most part they are much more subtle. To understand the trend and its potential bend the first, and most important thing is to identify said trend. In general, trends are usually straightforward enough to understand. People can complicate the subject, but in my mind, there are three types of trends – up, down and sideways. Here are the most conventional ways I have seen them identified:
- Uptrends are a series stock price movements where the new price high is higher than the previous high. When the price moves down from that high, its low is higher than the low following the previous high. In short, it is a series of higher highs and higher lows.
- Prices that rise and fail to make new highs, but then fall to new lows constitute a downtrend. It is a series of lower highs and lower lows.
- If the stock price rises to, but not above the previous highs and falls to, but not below, the old low, and the series repeats itself, the trend is sideways.
Using Friday (weekly) closing prices to connect the tops, I view the S&P 500 as currently in an intermediate uptrend and could potentially continue a longer term uptrend when and if the index makes an all-time high. The previous all-time high was the 2932.25 closing price the week of September 17, 2018.
Finding the bend is hard. Stock prices, and prices of just about anything you can chart, have hundreds, if not thousands, of indicator friends that give you hints about what the prices are going to do. It is a little like one of your friends telling you something positive, or unsavory, about your mutual friend. Hear a tale from one friend and it’s a rumor, hear it from two and it’s a coincidence. Indicators usually don’t give you enough information to act unless there are a bunch of them giving you the same story from different sources. Tales told multiple times from different reliable sources can be interpreted as signals for a bend in the trend.
In my opinion, today’s investor is looking at an intermediate uptrend the S&P 500 Index. That’s good. The environment for life is generally more pleasant when stocks are moving up. I do not see many of this index’s indicator friends giving bad signals either. I am calling the trend a good friend.
So where’s The Bend?
One indicator for a downward bend occurs when the week ending price closes significantly below the trend line. That number is subject to change each week, but right now sits around 2875 on the S&P 500 according to my pencil.
Another indicator, and a key one in my opinion, that a trend might be topping and beginning to bend may appear when S&P 500 makes an all-time high. At that point life is good. That’s when we need to look at the index’s indicator friends, If they are not exceeding the previous high they made as the S&P 500 rose upward, in this case, the high from the week ending September 17, 2018 then their life is not as good as it seems. That is a problem because we want the friends of our friends to remain friends and all have a good life. When both prices and indicators do not reach a new high, it is called a divergence meaning the price and indicator are moving in separate directions. It is hard for friends remain good friends when they move in separate directions.
So, if the S&P 500 reaches a new weekly closing high I will be watching Wildes’ Relative Strength Index (RSI) among numerous other indicators. If the S&P 500 Index exceeds its September 17, 2018 weekly ending close and the RSI does not also exceed its close for that week, then the momentum indicator will not have confirmed the price high. That is an indicator that my friend might be diverging from the previous path and, perhaps, begun to bend.
S&P 500 Three Year Chart of Weekly Closing Prices and RSI Readings
Chart provided by ICE Data Services, © Copyright 2019 Intercontinental Exchange, Inc.
Mike Fields is a Chartered Market Technician and Registered Representative and Financial Advisor of Park Avenue Securities LLC (PAS). OSJ: 5040 Roswell Road, Atlanta, Georgia 30342, 404-260-1600. Securities products and advisory services offered through PAS, member FINRA, SIPC. Financial Representative of The Guardian Life Insurance Company of America® (Guardian), New York, NY.PAS is an indirect, wholly-owned subsidiary of Guardian. Peachtree Planning is not an affiliate or subsidiary of PAS or Guardian
For more information about this report or to discuss how this outlook may affect your personal situation and/or to learn how this insight may be incorporated into your investment strategy – please contact Mike at 770-655-3759 or mike.fields@peachtreeplanning.com. 2019-77588 Exp 4.2021
S&P 500 Index is a market index generally considered representative of the stock market as a whole. The index focuses on the large-cap segment of the U.S. equities market. Indices are unmanaged and one cannot invest directly in an index. Past performance is not a guarantee of future results. This material contains the current opinions of the author but not necessarily those of Guardian or its subsidiaries and such opinions are subject to change without notice.