Last week, I watched the S&P 500 become overbought on both the weekly and daily charts. I also noticed stocks like Visa (V) display bearish engulfing patterns, suggesting a correction was imminent.
The next thing I did was add a “Correction Watch” page to my stockcharts.com Chart List. For me, this means simply a daily chart of each of the Dow 30 stocks with 50 and 200-day moving averages.
When the market corrects, as much as people love to debate downside objectives for a broad benchmark such as the S&P 500, you can better understand the dynamics of the correction by watching some of the larger names in the indexes.
Think of it as a sort of “visual breadth indicator” where instead of tracking breadth as a single data series, you watch the individual charts and then see what names are really driving the decline and which names are holding up well in a down tape.
Why don’t I just automate this sort of analysis? Why not simply set up a screen to show me which stocks are at their moving averages? There is a time for that sort of automation. There is also a time for taking a step back and keeping it simple.
Professor Andrew Lo, author of The Heretics of Finance (a fantastic book of interviews with legendary technical analysts), often showed a picture of a squirrel during his presentations. He would ask the audience to raise their hands when they knew what the picture represented. Then he would ask, “Do you know how hard it is to teach a computer what that picture represents?”
Technical analysis was the “business intelligence” for the financial markets before business intelligence was a thing. Charts represent the collective fear and greed of millions of investors, all in one easy-to-digest picture. As John Murphy explained to Andrew Lo, “I’m not sure I could explain to you how I do what I do. I look at many things in a short interval of time and come to a conclusion.”
So how can we quickly assess the status of a group of stocks? For me, this CandleGlance page of the Dow 30 members fits perfectly on a 27” monitor. I can literally glance through all 30 charts in seconds, quickly identifying which names are at key support levels.
When I run the page this morning, with the market about 8% below it’s 2018 high, I’m very interested to see which stocks are testing key moving averages.
Today I see 16 stocks testing their 50-day moving average: CAT, CSCO, GS, HD, INTC, JPM, MMM, MRK, MSFT, NKE, TRV, UNH, UTX, V, VZ, and WMT.
Microsoft (MSFT) is probably the best illustration of this pattern:
I also see 11 stocks testing their 200-day moving average: AAPL, AXP, CVX, DWDP, DIS, IBM, JNJ, KO, MCD, PFE, and XOM.
Apple (AAPL) is a great example of how this looks:
So as a review, 27 out of 30 Dow stocks have reached key support levels. How the names trade around these levels will indicate how the market overall will hold up in the coming weeks.
The CandleGlance page can provide a perfect opportunity for you to leverage your uniquely human ability to make visual comparisons.
David Keller, CMT
Sierra Alpha Research LLC
David Keller, CMT is President of Sierra Alpha Research LLC, a boutique investment research firm focused on managing risk through market awareness. He is a Past President of the Market Technicians Association and currently serves as a Subject Matter Expert for Behavioral Finance. David was formerly a Managing Director of Research at Fidelity Investments in Boston as well as a technical analysis specialist for Bloomberg in New York. You can follow his thinking at marketmisbehavior.com.
Disclaimer: This blog is for educational purposes only, and should not be construed as financial advice. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional.