Testing Technical Analysis

I’ve finally managed to recover from the worst of my illnesses, after getting a fresh round of antibiotics to take care of something called ‘hemophilus influenzae’ that was making things pretty unbearable for a while. As I type this on this Wednesday, the third week anniversary of when I first went in to the doctor for an illness, I’m still stuck with a cold, but I am feeling far better than before.
The same cannot be said for financial markets in the last couple of days. Between the GBP/USD flash crash and continued weakness and stocks taking a nasty hit on Tuesday, I imagine there’s an abundance of Advil circulating around trading floors. If technical analysis is to be believed, painkillers could soon be flying off the shelves.

Bloomberg

Let me first assert that, as a college student, I’m not going to pretend like I know what I’m saying is completely accurate. I’m more or less learning as I go, and there’s bound to be times where I say one thing and the complete opposite happens. Caveats aside, above is a screenshot of the Dow Jones Industrial Average from Monday with a bearish pennant formation. This pennant is bearish as per the 2.88% contraction (flagpole) around the early part of September, which kicked off the pennant formation. The Dow fell 200 points on Tuesday, and as of this typing, is up about 34 points on this Wednesday at 18,163 points. Needless to say, Tuesday’s big drop was the downward breakout point for the Dow we were looking for. The drop came on the heels of uncertainty over the OPEC “deal”, a surging Dollar, and general anxiety over market volatility, certainly not helped by the Cable flash crash earlier. While conditions today (10/12) are slightly better and major indices are showing modest gains, DJIA remains below the pennant’s line of support. I’ll be watching carefully in coming days to see if this line of support is treated as a new line of resistance, or if markets rally and the pennant formation was likely a false alarm. Only time can tell.

Bloomberg

I’m not too convinced that this is just a flash in the pan with respect to the pennant formation yet. The S&P 500 has been exhibiting the same kind of bearish pennant formation as the Dow, with a drop of ~60-70 points at the flagpole. As a result of Tuesday’s sell-off, this pennant too was broken, and again I’m watching carefully to see if this holds and the index remains at subdued levels relative to what we saw in the pennant.

Bloomberg

The ‘kicker’ to me is a strong bullish pennant formation we saw in the VIX. This formed at the same time as the S&P 500 and Dow pennants, though this flagpole was bullish with a 71.47% gain in early September. Tuesday’s sell-off saw this pennant broken, and the VIX stands at 15.71 as of this typing (Wednesday). With the VIX pennant broken in an upward movement as expected, the idea that the bearish pennants in DJIA and SPX were valid gains traction. Again, it’ll take a couple more days to see if this is actually true, but things are certainly looking that way.

Ideally, I’ll be over this cold in the next couple days and I can finally have a day where I’m not sick with anything. That day should come very soon, but if technical analysis is to be believed, the same cannot be said for stocks.

Andrew