We will now find out if technical patterns mean much anymore, particularly in the key US stock index market of the S&P 500 ($INX). I was set to make the argument activity during January resulted in the clearest example of key bearish reversal that could ever exist. The $INX posted a new all-time high of 4,818.62 early in the month before collapsing to a low of 4,222.62, taking out not only the December low of 4,495.12 but the previous 4-month low of 4,278.94 (October). After all that, the $INX closed at 4,515.55, down 250.63 for the month. Absolutely, positively bearish, right? 99% correct, for there is a strict school of technical analysis that argues a key bearish reversal MUST have the market in question close below the previous month’s low, something the $INX was just able to avoid with its late January rally. Will this be enough to offset the bearishness of the obvious new 4-month low? Maybe. And if investors are applying the Wilhelmi Element (the only price that matters is the close), the monthly close-only chart is bearish, but not as much so as this standard monthly bar chart.
In the end it may not matter. It’s entirely possible technical analysis is dead, replaced by the Random Walk Theory that so many have believed to be in place all along. And of course there’s Newsom’s Market Rule #7 that tells us, “Stock markets go up over time”, also raising questions as to how much bearishness to read into technical patterns.