In my experience, fundamental and economic analysis predominately drive Wall Street. Therefore, it is my belief that the Technical Analyst, while being 100% true to their craft, should as best as they can complement and not compete with the Fundamental Analyst and Economist. 

That said, when I used to speak at client meetings and/or seminars, or to new in-house fundamental research associates, I would start by stating that “earnings drive long-term price movement, but, by studying price action, technical analysis aids in discerning when and if a change in fundamentals is coming and/or developing.”

Within the context stated above and in reviewing the chart below, I can make the following observations:

  • The last painful and extended pullback period by the S&P 500 (SPX) was between 2015 and 2016.

  • Prior to 2015-2016 the trend of the SPX Earnings (GAAP) was “up,” defined by a pattern of higher troughs and higher peaks—the simple definition of an uptrend.

  • Once the SPX’s earnings trend turned “down,” defined by a pattern of lower peaks and lower troughs, the index (and the entire equity market) corrected.

  • Currently, despite all of the headline news, geopolitical events, inflation concerns, volatility in the currency markets, valuation concerns, trade war, mid-term election and seasonal concerns, the earnings trend of the SPX continues to move higher, and the Russell 3000 (representing approximately 98% of all investable assets in U.S. equities) closed at a record high last Tuesday, 7/7/18.

S&P 500 Weekly Chart. Until the price movement went almost parabolic in January, the higher earnings trend produced higher equity prices. S&P 500 Earnings (GAAP). Higher earnings trend (higher toughs and higher peaks) equated to higher equity prices. Lower earnings trend (lower peaks and lower troughs) equated to lower equity prices.

Summary: Admittedly, this is a very basic discussion relative to P/E analysis. However, while short-term price and time corrections will occur, until earnings trends turn “down,” as defined above, and/or negative technical divergences occur across all equity market capitalization segments, the odds favor the current primary uptrend has further to go.

In the meantime, a band of selling pressure (resistance) for the S&P 500 exists between 2850 and 2873. An initial level of buying interest (support) for the SPX exists at 2825, followed by a layer of support between 2800 and 2790.

Day Hagan Asset Management appreciates being part of your business, either through our research efforts or investment strategies. Please let us know if we can do any additional work for you. 

Art Huprich, CMT
Chief Market Technician
Day Hagan Asset Management

—Written 08.12.2018. Chart sources: 

PDF Copy of Article: Day Hagan Tech Talk August 13, 2018 (pdf)

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