How to Make Sense of This Crazy Market? Look to the Numbers - The Wall Street Journal

While many investors study companies’ profit and cash positions, others look at charts to figure out what is coming next.

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Paul Vigna

Paul Vigna
The Wall Street Journal
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April 13, 2020 7:00 am ET

Stock investors are beginning to act like the worst is over in the coronavirus-fueled market rout. Those who rely on technical analysis say there is likely more pain ahead.

Technical analysis is the practice of making bets on securities prices largely without recourse to company and economic fundamentals, depending instead on reading charts and their resemblance to past trading patterns. Though its practitioners speak its praises, many investors and traders view this practice as unsound and its purported successes as largely explained by randomness.

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These investors buy and sell stocks based on market trends, chart patterns and often obscure indicators. And despite the market’s recent bounce off its late March lows, many of them remain skeptical about the outlook for stocks.

That is because some of the indicators they watch, from 200-day moving averages to the more complex Bollinger Bands and Fibonacci retracements, suggest the market is still under stress. The S&P 500 is down 18% from its Feb. 19 record, after rallying 25% from its March 23 low.

The 200-day moving average is one of the more mundane indicators used by technical analysts. It measures the market’s longer-term performance by smoothing out price action to filter out short-term disruptions. Markets consistently trading below the 200-day moving average are seen to be in a downtrend. Bollinger bands and Fibonacci numbers are more obscure indicators. The former are used to define normal ranges and trends. A break one way or the other outside the bands, each placed one standard deviation above and below a moving average, could indicate a large move is ahead. Based on a 13th century mathematical formula, Fibonacci retracements are used to identify support and resistance levels, indicating how far a rally or selloff might extend.

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“Nothing in my toolbox, price indicators or breadth indicators, shows a single positive indicator,” said Adam Koos, who runs Libertas Wealth Management Group, an investment firm in Columbus, Ohio, with about $68 million in assets under management.

Mr. Koos says he plugs 13 different technical indicators into four trading models. Nine of the indicators measure breadth—or how many stocks and sectors are moving up or down—and the others focus on price. Optuma, the program he uses, alerts him when they hit specific levels that indicate the time to buy or sell.

Based on those technicals, he says he hasn’t been swayed by the market’s recent gains.

One key price indicator that Mr. Koos and other traders watch to gauge whether the market is a longer-term upswing or downturn is the S&P 500’s relation to its 200-day moving average. At about 2790, the index is still well below the current 200-day moving average of 3016.

A variation on that measure is looking at how many companies are trading above or below their own 200-day moving averages. That is an indicator favored by JC Parets, chief market strategist of research-firm All Star Charts.

Currently, only 9.6% of the companies listed on the New York Stock Exchange are trading above those levels—a sign that the market is still in a downtrend, despite its recent gains.

A number that would suggest the market has bottomed and is entering a new upswing would be around 15%, Mr. Parets said.

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Although the major stock indexes have retraced about half of their February-to-March losses, Frank Cappelleri, executive director of brokerage Instinet, agrees the market still doesn’t look healthy from a technical standpoint.

Mr. Cappelleri, who writes daily trading reports that are heavy on technical analysis, says the most important market indicator right now is fairly obvious: The first sign that the stock market is through the worst of its selloff will be when its massive daily swings moderate.

As encouraging as the recent gains have been for investors, big daily moves are a hallmark of stressed and bear markets, he said.

The market’s moves last week illustrate his point. Monday’s 7.7% gain for the Dow Jones Industrial Average was its 28th consecutive swing—higher or lower—of at least 0.5%. That was the longest such run since October 1931.

Although the streak was broken Tuesday when the Dow slipped 0.1%, it was hardly a quiet day. The index had risen as much as 4.1% earlier in the session, before giving up its gains. The Dow staged big rebounds Wednesday and Thursday as well to end the holiday-shortened week.

“Until you see less of those swings on both sides, you have to be suspect of the overall price action,” Mr. Cappelleri said.

Related Video

Markets remained fixated on the coronavirus pandemic and retailers continued to struggle, even as U.S. stocks had their biggest one-week rally since 1974. Paul Vigna breaks down this week’s winners and losers. Photo: Lucas Jackson/Reuters

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Write to Paul Vigna at paul.vigna@wsj.com

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