Technical Analysis as a forecasting tool…

Introduction:

The purpose of this posting is to show how technical analysis can be used as an economic forecasting tool in regards to projecting short term, near term, and  intermediate (i.e. long term) trends.  A significant amount of the work completed during this posting was comprised of several economic, real world tacit knowledge, tools matriculated during my years of studying charts and technical analysis.

Disclaimer: This blog is published solely for information purposes and is not to be construed as advice or a recommendation to buy or sell a security. Trading involves risk, including loss of principal and other losses. Trading results may vary. No representations are being made that utilizing techniques mentioned in this  will result in or guarantee profits in trading. Past performance is no indication of future results.

 

Technical Analysis:

             Technical analysis is despised and feared by many classical and traditional traders because it is considered to be a, computerized, manipulated,  and evil, leveraging tool that cannot read, predict, nor understand human emotions and or psychology.  On the contrary, technical analysis allows the modern trader to leverage off quantitative and behavioral economic analysis via using historical exchange rate data to estimate future values.  The concept is technical in nature, as it extrapolates from past exchange trends and ignores economic and political determinants of exchange rate movements and preferential bias. 

            Technical analysis uses an assortment of charting techniques involving a security (or economic unit) price, cycles, or volatility. 

“A usual starting point for technical analysis is a chart that plots a trading period’s opening, high, low, and closing prices.  These charts most often plot one trading day’s range of prices, but also are created on a weekly, monthly and yearly basis.  Traders watch for new highs and lows, broken trend lines, and patterns  that are thought to predict targets and movements” -Robert J. Carbaugh

Market Forecast

            From a technical analysis perspective in regards to projecting future short term (days to weeks), near term (weeks to months), intermediate “long” term (months to years); the S&P500 Index is widely regarded as the best single gauge of the large cap U.S. equities market.  The index was first published in 1957 and has over $5.58 trillion benchmarked dollars, with index assets comprising approximately $1.31 trillion of this total.  The index includes 500 leading companies in leading industries of the U.S. economy, capturing 75% covering of U.S. equities (http://www.standardandpoors.com/indices/sp-500/en/us/?indexId=spusa-500-usduf–p-us-l–)

Using the following chart (Ticker Symbol $SPX), using technical analysis we can project the following;        

The following chart was retrieved from the TD Ameritrade Think or Swim Trading Platform (https://www.tdameritrade.com/tradingtools/thinkorswim.html)  

The intermediate long term trend remains bullish as it has advanced about 28.49% in value since the market close of $1,136.43 on September 29, 2011.   The bullish trend is supported by a high volume trend break out on the 200, 20, and 30 day simple moving averages. We are currently testing a new level of intermediate resistance at the September 14th, 2012 close of $1,465.77.   As there has been a natural short term retracement of about 0.38% which is common, as this type of price movement signals a slight pause in upward momentum and has not yet been confirmed as  a reversal.  Often pullbacks are seen as buying opportunities after a security has a large upward price movement.  It is important, however, to analyze closely any pullback as it may be a sign of a definite reversal or a slight pause in the upward trend, each having different trading implications (http://www.investopedia.com/terms/p/pullback.asp#axzz27L3XlZY0)

            Long term market sentiment continues to support the bullish strength on the S&P500 Index as both the long and the mid curves of the following investor sentiment chart are directed upwards;   

The following chart was retrieved from The IMR Stock Market Sentiment Forecast website (http://imr-forecast.com/)  

S&P 500(BLUE)   Leading Sentiment (GREEN)  Current Sentiment (RED)

The S&P 500 market posture remains bullish on the near term as it is also being supported by higher highs and lows on $SPX chart.  In regards to the short term, bullish momentum is still supported by the market volatility index, also known as the VIX.  The VIX is an index created to track market volatility as an independent security.  The VIX is calculated based on option activity and is used as an indicator of market sentiment.  The VIX is the most widely used technical tool used in tracking the S&P500, with high values indicating pessimism & low values indicating optimism.

Using the following chart (Ticker Symbol $VIX) we can project the following;

The following chart was retrieved from the TD Ameritrade Think or Swim Trading Platform (https://www.tdameritrade.com/tradingtools/thinkorswim.html)  

Using the argumentative support of “Ceteris Paribus”; in theory and only for this report; The current period of low volatility, historically is a measure gauge that tends to rise as stocks fall and vice versa.  The VIX closed below 14 and marks the lowest close since June 2007.  This inverse relationship via a technical “Ceteris Paribus” bias supports the bullish short term indicator.

Conclusion:     

            There are several technical analysis indicators that can be used to project and forecast market trends, cycles, and security prices.  The charts used in the following report are just some of the elemental indicators used by market technicians and security traders and cover the principle basics in regards to technical and market analysis.  Furthermore, technical analysis is an efficient tool that can be complimented along with fundamental analysis in order to support quantitative methodologies, economic forecasts, and market analysis.          

Disclaimer:

This blog is published solely for information purposes and is not to be construed as advice or a recommendation to buy or sell a security. Trading involves risk, including loss of principal and other losses. Trading results may vary. No representations are being made that utilizing techniques mentioned in this  will result in or guarantee profits in trading. Past performance is no indication of future results..

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