This article was published on Business Times’ column “Chart Point” on 9 October 2017.
S&P 500 daily chart Source: Bloomberg, PSR
Red line = 20-day exponential moving average, Blue line = 60 ema, Green line = 200 ema
*Highlighted areas show the dip buying pattern off the 20 and 60 ema
With the 10th anniversary of the Great Financial Crisis (GFC) just ahead of us, the US equity market still appears firm and steady as it continues to break new record high. Current economic growth puts us in the third longest growth in history since 1933 at 99 months implying a late stage economic cycle. To put the economic growth cycle into context, the housing boom period of 2000 had an economic boom of only 73 months while the longest economic expansion growth came from the 1990s decade with 119 months. This is not to say that a major downturn will happen in the days to come but its good to know where we are in the current economic cycle. At the end of each economic expansion cycle comes a recession where the market tends to enter into a severe prolonged correction.
Looking at the price action of S&P 500 index, the current uptrend remains unshakeable even in the backdrop of rising geopolitical tensions in Korea. The market only sprang to life after November 2016 with the unexpected Trump presidency victory being the catalyst, taking out the 2016 high of 2193 points. Since then, the S&P 500 index trended higher steadily without a correction greater than 3.5% and the year to date gain of the S&P 500 index is 14%.
There seems to be a clear pattern to time the reversal of the market dips since 2017. The 20-day exponential moving average (ema) and 60-day ema acted perfectly as a springboard on every retracement shown by the highlighted areas where the uptrend takes back control. For example, the six weeks correction from 1 March was halted impeccably off the 60-day ema one month later in April moving the S&P 500 index back into the uptrend. EMA shows the average of the price over a defined number of time periods with greater weight placed on the recent prices.
With optimism prevailing, we expect the S&P 500 index to grind higher in the meantime as the 20 and 60 ema continues to propel price higher on any dips. Currently, the daily relative strength index (RSI) is implying an extremely overbought condition as it recently hit a high of 80. A correction is likely to happen when the RSI enters into extremely overbought condition just like in December 2016 and March 2017 where the RSI hit a high of 77 and 82 respectively. Hence, the next time a correction happens, the 20 or 60 ema would most likely reverse the selloff and relaunch the S&P 500 index back into the uptrend in search of the next record high.
On the other hand, on the bearish side, a major shift in sentiment will only occur after the S&P 500 index breaks below the 20 and 60 ema significantly. Further confirmation of a trend reversal will be flagged out once the 20 ema crosses below the 60 ema.
To sum up, watch the 20 and 60 ema closely as that will dictate if the uptrend remains valid or broken. Do note that this dip buying pattern is also apparent in the Dow Jones Industrial Average and Nasdaq 100 index.