By Rob Isbitts
Two words: “Trendline resistance”
You don’t have to be a techie since your teenage years like me to appreciate the simple message that the stock and bond markets are screaming at investors right now. In In fact, the message has been the same throughout 2022. That message, to quote the classic movie Monty Python and the Holy Grail, “none shall pass away!” The most popular stock and bond benchmarks, as well as many of their underlings, send the same signal. They marked the proverbial line in the sand all year round. And until that wall, defined by the price levels I show you below, is breached, the bear market is here to stay.
Oh, there will be gatherings. We have seen them all year. But there is a difference between a rebound and a bull market. Trendline resistance can be a great help in helping investors distinguish between a bullish trade in a broader bear market and a true “long-term” sustainable upward move in stocks, bonds or other assets.
Now, with that preamble and definitions out of the way, let’s spend the rest of this space looking at some of the best evidence I’ve seen in four decades of examining rows organized on a page. The evidence points to simple conclusions. And, whether you think charting is the only way to invest, whether you think it’s voodoo and horse hockey, or somewhere in between, I hope this adds some perspective to your analysis. In progress.
Those stupid technical analysts? Not anymore.
Because while techies were once the people in the back corner of the investor side, modern market entities such as algorithms, hedge funds, high-frequency traders, and a host of other players in the money market use them. So, at the very least, I think it helps to know what’s going on, especially when the proverbial and literal lines are drawn so clearly. Of the endless number of complex analyzes that we chartists perform, one of the most basic seems to hold the key to price movement right now. This is not only the case for stocks, but also for bonds. We’ll take a look.
S&P 500: Downtrend line at a key point
Above I have plotted the S&P 500. Since the start of 2022 it has drawn a very clear pattern, which is marked by the thick black line. This is what we call “trendline resistance”. In English it means a series of price levels that can be connected with a straight line to create a trend.
Think of it this way: The S&P 500 has been trying all year to jump above that line. Every time he succeeds, he fails. Since the highs keep falling, the longer they remain without breaking, the lower the “bar” continues for the stock market. This is what a bearish stock market looks like.
Where are you going? No one knows for sure, but with so much focus on technical levels these days, I will highlight a few key levels to watch. One is the current resistance level, which I estimate to be in the 4075 area. The problem is that there are more and more signs that the S&P 500 is already “testing” this line thick, before she even reaches it. What’s even harder for bulls these days is that 2022 has shown a lot of false breakouts. So even a quick push to, say, 4,100-4,200 is more likely than in the past to be a fake-out-breakout.
If the market finally manages to recover, there is good news. The old highs of 4,800 would be in play, but with some intermediate hurdles at the previous two highs, retreating in March and August. Finally, and more likely the way it is going, if the market breaks through that thin red line, this year’s lows (3,500 area), it’s “look down.” More on that if/when that happens.
What do you do with this information? Let the S&P 500 prove it’s not just a downhill run. Don’t be overzealous with every little rally in the bear market. Because that’s what they are until proven otherwise.
TLT: same thing, different market
If you need visual proof that the long-term US Treasuries market has spent most of 2022 following the S&P 500 lower, here it is. Same concept as above, just with iShares 20+ Year Treasury Bond ETF (TLT) displayed instead. I see some investors getting excited about a huge reversal from that dramatic 40% decline in the price of TLT since late 2021. it breaks out decisively and stays above that thick black line. If he gains a few more percentage points, we’ll have a good clue.
When I scan through hundreds of charts (ETFs and stocks) each week, I’ve seen a similar pattern in many of them all year: trendline down, clear resistance at trendline, tested but not broken. Conclusion: bulls have a lot of proof to do. Otherwise, keep thinking “bear market recovery”.
10-year Treasury bill rate: OMG
Finally, here is perhaps the most disheartening chart for those who think the benchmark 10-year US Treasury rate is about to reverse and drop, wiping out all those threats of higher rates and inflation like it was just a bad dream. . Sorry, Dorothy from the Wizard of Oz. We are not there yet.
Above you see a 10 year chart. Note that the scale on the right is the return multiplied by 10, so that 50.00 equals a return of 5.0%. This is a very, very long-term chart. It goes back to 1980. So it shows the whole bond bull market, which lasted four decades. That era may or may not be over. Unless you’re prepared for some very uncharted territory when it comes to bond yields, you better hope it’s over.
Because what I see here is a possibility…I repeat, a possibility…that the recent breakout in 10-year Treasuries that happened two months ago could go much higher. How much higher? Well, it’s around 3.7% as I write this. A previous high level to target is around 5%. Another beyond is 8%, marked by the thick red line. Either of these would add insult to injury for bond investors, and the threat of this type of move is why I say to anyone who will listen that the simple act of buying long-term bonds of any kind and assuming they are risk-free is, well, very risky.
The final level, if things get really out of hand, is where you should probably get the little kids out of the room. I’ll wait.
OK, with the room clear, I can now tell you that the upper end of the range you see in the chart translates to a 10-year Treasury rate of 15%. Am I calling about this? No. Am I expecting it? No. Am I allowing it as a possible endpoint for the first bond market bear since I was a kid? Yes. Because back in the 1970s, I’m quite sure no one expected odd-even days on the gas lines, hyperinflation, and the other aspects of a post-boom economy that have since been forgotten long time.
Trendline resistance: good to know
Trendline resistance is a simple concept. And today, given the state of market conditions, in a year where the price of long bonds fell 40% and the Nasdaq fell more than 30% at one point, can we really say that these are just silly images with no basis in reality? After 42 years of charting and watching these patterns develop in their early stages last year and into 2022, I say this: Allow many possible outcomes and ignore historical patterns at your peril.