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Dave & Donald Moenning

Mr. David Moenning is a full-time professional money manager and is the President and Chief Investment Officer for his Chicago-based Registered Investment Advisory firm, Heritage Capital Management (...

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Do Chart Levels Matter Right Now?

After the relatively wild action seen late last week, the question of the day is if the swings we saw on Thursday and Friday are meaningful, or simply the work of the trend-following bots doing their thing.

Recall that on Thursday the S&P 500 fell 23.45 points, or -1.2 percent on a plethora of headache-inducing headlines. First it was new sanctions on Russia for the handling of the situation in Ukraine. Next it was flight MH17 being shot down over Ukraine.

Then the Fed's James Bullard chimed in about the Fed needing to raise rates sooner than expected.

After that, we heard that Israel had initiated a ground offensive in Gaza and that the White House was on lockdown. Finally, there was the report that the largest insider trading probe in history had begun and involved no fewer than 44 hedge funds.

Through most of the day on Thursday, it is important to note that the market held up pretty darned well. The thinking seemed to be that the downing of another Malaysian airliner was likely not an act of war and that the various skirmishes in Gaza rarely affect the markets.

However, in the last hour, traders and their computers took the market back to the lows of the day, snapping a bunch of technical levels in the process.

Related Link: 7 Headlines That Could've Caused Your Market-Related Headache

Then on Friday it became clear that although MH17 was indeed shot down by a sophisticated Russian-built BUK surface-to-air missile; it was not the work of either the Russian or Ukranian governments. So, given that WWIII was not on the line, the dip buyers returned.

As the momentum began to build to the upside, the trend-following bots jumped on board in earnest at three different points during the day. Before you knew it, the S&P had regained 20 of the 23 points lost on Thursday, and the word in the press was that traders were "relieved."

However, as was mentioned in Friday's missive, this appears to be more a case of trend-following bots doing their thing than investors making adjustments to their portfolios based on fundamentals.

But Do The Levels Matter?

There is an old saying on Wall Street that may be appropriate here. "It's not a breakout if you are the one breaking it out."

In other words, a trader shouldn't base their view of the market action on something that they themselves were responsible for. In short, this seems to be exactly what is happening in today's market and a great way to sum up the dilemma facing traders this week.

Today, the question is this: Given that the trend-following bots continue to move prices intraday in one direction until they don't, do the key price levels really matter?

Bulls Point to the Charts

S&P 500 Daily
spx_daily_7-21-14.png

One of the bullish arguments at the present time is that through all of the bad news and geopolitical tensions, the S&P has held above important near-term support and that the uptrend line that has been intact now since mid-April has not been violated.

Most technicians would likely agree that the chart of the S&P 500 remains in pretty good shape. As such, one could argue that the bulls should be given the benefit of any doubt. But...

iShares Russell 2000 Smallcap ETF (NYSE: IWM) Daily
iwm_daily_7-21-14.png

The chart of the Russell 2000 ETF tells a completely different story. In short, the chart of the IWM is not a pretty picture. From a short-term perspective, a downtrend is evident. From a long-term perspective, one can argue that a double-top is in place.

The bottom line is that (1) the charts of the S&P and Russell 2000 represent a clear case of technical divergence, and (2) it is unclear if the trend-following bots care about the important technical levels that traders tend to key on.

Therefore, it is probably a good idea to continue to watch the action closely.

Tags: Gaza James Bullard Malaysia Air

Posted in: Technicals Economics Trading Ideas