Stock Market Triggering Bullish Technical Signals

Insights | Stock Market Triggering Bullish Technical Signals

Author: David I. Templeton, CFA, Principal and Portfolio Manager

Since October 13, 2022 the S&P 500 Index is up 11.80% on a price only basis. For the start of 2023 the S&P 500 Index is up 4.16% through January 13, 2023. The positive move in the market is welcome news to investors after last year's market experience, yet the S&P 500 Index remains down over 16% from its peak in January of last year. Nonetheless, this recent recovery in the market is triggering some bullish technical indicators. There is a large contingent of equity traders and analyst who view the technicals of the market as one of the most informative factors to consider when evaluating the potential direction of the market. This post will highlight a few of these technical measures as some are providing favorable indications for a further move higher in the market.

Below is a chart showing that the new highs minus new lows indicator (USHL) has crossed its 10-day exponential moving average from below on January 11, 2023, i.e., the black line crossing the pink line. The vertical green lines on the chart highlight previous crosses of this nature. In the past when this has occurred the equity market (blue line) has moved higher as represented by the iShares Core S&P US Stock Markt ETF (ITOT.) The red vertical lines indicate times the USHL crossed its pink 10-EMA line from above, potentially signaling a weaker returning equity market environment. Importantly, follow through by the equity market needs to occur. In August of last year a similar bullish cross occurred but lasted only a week.

stocks highs exceeding lows bullish equity market indicator. ITOT

Ned Davis Research publishes a table and chart that utilizes a similar variable as in the above chart but they evaluate the 10-day NYSE advances and declines ratio. When this ratio rises above 1.9 the Dow Jones Industrial Average in this case tends to mostly generate positive returns looking out 126 and 252 days as seen in the below chart.

Ned Davis Research NYSE 10-day advance decline ratio and Dow Jones Index

Technical analysts also utilize chart patterns to inform them on the potential direction of the market. One chart pattern is the cup and handle pattern (C&H) which generally plays out over somewhat longer time frames. The below chart of the S&P 500 Index shows two cup and handle chart patterns have developed, the larger one starting in August of last year and the smaller one in September. The smaller C&H set up has triggered with an S&P 500 Index target price of 4,331. The larger one has broken out of its handle formation but faces resistance at the line formed at the top of the cup. The S&P target price for the larger C&H pattern is 4,709 if a breakout occurs. There are slight variations in calculating the target price, but one method calculates the price by determining the difference between the market price at the top of the cup to the bottom of the cup and adding it to the price at the top of the cup.

cup and handle chart pattern for S&P 500 Index as of January 13, 2023

With technical analysis there is no one particular chart that provides perfect insight into the market's future direction just as in using fundamental analysis there is not one magic variable. As the above technical factors provide a favorable view of the market, the below chart shows a technical pattern noting near term market head winds. The chart shows a longer-term view of the S&P 500 Index, and the red line is resistance that starts with the market top in January last year. The S&P 500 Index closed at 3,999 on Friday and the market faces resistance (red trend line) at about 4,034. Further, the yellow line on the chart is the market's 200-day moving average. This line is in a declining trend, and an indication the longer-term direction of the market remains in a down trend. An upward trend would be nice to see develop.

S&P 500 Index one year resistance line as of January 13, 2023

As we noted in our recently publish Winter Investor Letter, maybe the negativity around the market/economy is overdone and possibly a favorable equity market might be in store for investors in 2023? The equity market's favorable return since October is certainly resulting in some of the market technicals trending in a more favorable direction, at least one positive for potentially favorable market returns ahead. 

HORAN Capital Advisors, LLC is an SEC registered investment advisor. The information herein has been obtained from sources believed to be reliable but we cannot assure its accuracy or completeness. Neither the information nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Any reference to past performance is not to be implied or construed as a guarantee of future results. Market conditions can vary widely over time and there is always the potential of losing money when investing in securities. HCA and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only and is not intended to provide and should not be relied on for tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.