GETTING PERSPECTIVE AND DEALING WITH VOLATILITY | chart of art

The S&P 500 is down 5.5% this month and volatility is getting ugly. This is a great time to put movement into context to gain perspective. My goal is to see the forest, not just a few trees. First we need to know whether it is a long-term upward trend or a long-term downward trend. Knowing this answer allows you to answer the second question. Is the current decline a primary or secondary movement? Let’s start with the long-term trends.

The chart below shows the S&P 500 with its 5-day SMA (green) and 200-day SMA (red). First, note that the index hit a new all-time high in March. For those of you who keep score at home, it’s been less than a month! SPX is also well above its rising 200-day SMA and its 5-day SMA is 7.5% above its 200-day. These items suggest that we are in a long-term upward trend.

The indicator window shows the signal line as a percentage (5,200) relative to the MA with +3% and -3%. This indicator shows the percentage difference between two moving averages. First, the 5-day SMA ensures a smooth closing. This smoothing will significantly reduce the number of whipsaws, but there will still be quite a few after 2022 (see yellow ovals in the price chart).

For the signal filter, the 5-day SMA must be at least 3% above or below the signal’s 200-day SMA. As you can see from the indicator, the percentage above MA turns green when 5 days cross above 200 days, and turns red when 5 days cross below 200 days. There have been at least 17 crosses since late 2018. Applying a signal filter reduced the number of crosses to just six (red and green arrows). These thresholds filter out noise and short-term volatility. This strategy turned bullish in early February 2023 and remains bullish. Percentage to MA is one of 11 indicators in the TIP Indicator Edge plugin for StockCharts ACP.

Charles Dow points out that there are three types of price fluctuations: primary fluctuations, secondary fluctuations, and daily fluctuations. According to the chart above, the main movement is upward (long-term upward trend). SPY plummeted in April and the secondary move was also lower. A secondary decline within a primary uptrend is a correction, and a correction within an uptrend is an opportunity. No one knows how long the fix will last or how extensive it will be. So any indication of future support is largely speculation. Chartists would be better off focusing on price action and breadth and looking for signs of improvement that would suggest the end of a correction.

TrendInvestorPro monitors these corrections and times reversals by analyzing price action, 4-week high-low percentage, 50-day excess percentage, and other breadth indicators. This is part of ChartTrader reports and videos. Our SystemTrader product implements a dual momentum rotation strategy for the Nasdaq 100 and S&P 500. After a big rise in the first quarter, it turned to a decline in April. A decline is like a correction in that it presents an opportunity. Click here to learn more and get instant access.

Photo: Lukasz Szmigiel, Unsplash

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