Some ‘Technical Help’ using Technical Analysis (TA) during a stock market panic.

Why TA works better during market stress?

We, humans, are pattern-seeking animals. Despite wide acceptance of Behavioral bias mitigants, efficient market hypothesis, and random walk theory; technical analysis tend to work during market stress. TA seems to work because stress awakens our forager psyche. As Yuval Harai puts it in his book- Sapiens:

“We are people with the psychology of a forager and the diet of a farmer”. 

In a way, the weight of the evolutionary process on our psychology is so heavy that we are still unable to lift ourselves and adjust our behaviors to match with modern financial theories.

The Golden line during the Great Financial Crisis (GFC).

Above is the weekly chart of the S&P 500 Index with a 200 weeks simple moving average line in green color. As we can see, this line has first acted as support during the start of the crisis. The index found support in that line in January and March 2008 and bounced off. The index finally breached the line in June 2008 and hovered around the line until the market accepted the new reality and continued its downward trend.

Once breached, the same line acted as a resistance line. S&P 500 Index tested the resistance in April-2010 but failed to breach it. Again tested the line in November 2010, but this time could breach it. Index hovers around the line until the market digest the new price and its level above the resistance and takes off from there by December-2010.

S&P 500 Index and the golden line in 2020

The golden line of 200-weeks simple moving average seems to be working in 2020 also. This is the line from where the market bounced in December-2018. During the current panic, this line was breached from above in March-2020and tested the line twice after that. SPX broke the resistance (2650) last week shortened by the holiday.

Take-away

The lesson from this is the worst is over for SPX and it is advisable to take some risk and start buying.

What is different this time?

Many variables are different this time compared to GFC that may influence the trajectory market will take.

1. Wall of money- Monetary and fiscal are already in full gear now.
2. 2020 fall is much dramatic compared to 2008.
3. Apart from Equity, there is no asset that one can invest based on an intrinsic valuation.
4. Result season is starting soon, a negative surprise may take SPX below the line again.

Remember, when we trade on TA, we should be ready to cut losses ruthlessly. Watch the line at 2650.