There are those analysts who emphatically believe in technical information. They like the charts, the price movement and the moving averages. Then there are those who identify with equity fundamentals. They track cash flow, price-to-earnings (p/e) ratios and "what a company is worth on paper."
In my world, I do not discount any form of information. Granted, I favor historical data and contrarian indicators (i.e., "don’t follow the herd" info). Yet I think that economic data, seasonal info, the flow of money, consumer sentiment… everything has its place in helping one make a sound investment decision.
Today, I wanted to take a look at a popular technical term called "resistance." Specifically, when benchmarks like the S&P 500 (SPY) and the Dow Industrials (DIA) fall, there may or may not be a floor. And when that floor has been tested and retested, the resistance often indicates a level where the market will bounce higher off that floor.
In June, the major benchmarks have been testing resistance levels. For the Dow, the "June low" is roughly at 13250. For the S&P 500, that number is approximately 1490. And at 10:40 in the morning PST on June 27… the time that I am writing this post… the Dow is at 13290 and the S&P 500 is at 1490.
What’s significant about these facts is that, as far as technical analysts are concerned, 13250 and 1490 need to hold on a 3rd challenge of the lows. If they do, all would supposedly be right with the bull market, and we would soon be heading for new market highs.
In complete contrast, if the stock market indicators fall significantly below 13250 and 1490 on this third and "final" test of recent lows, the floor would be broken. (Many might then say… "Look out below.")
Information by its very definition is flawed. And all of the major forms of data have the ability to mislead. Nevertheless, a general grasp of each philosophical approach gives investors the best shot at achieving success.
First, let’s see if the resistance level is strong enough to hold. If it does, and if the markets soar to new highs, one might have to tip his/her cap to the technical analysts out there.