I’ve been a serious student of the markets for 30 years. I’ve looked at the stock market from nearly every conceivable angle. I’ve passed difficult licensing exams to prove I know how to analyze a company’s fundamentals. I’ve passed demanding assessments to prove my technical analysis skills. I can easily say I’ve read more than a dozen books each on technical and fundamental analysis.
In summary, I know how to read a financial statement and a stock chart.
Yet the easiest way I know to come up with a forecast for where a stock or the market is going is to simply eyeball its chart.
There are certain charts you could show a 10-year-old and ask them, “Which way is the stock going?” and “Which way do you think it will go?” and the kids will get the answers right.
Here’s an example. I excluded the company’s name so you don’t have any biases or in case you know where the stock ended up.
In what direction do you think it went next?
Here’s what happened.
The stock is PayPal (Nasdaq: PYPL), and its price was cut in half after already having been nearly halved in the four months prior.
Let’s try another one. This one is less dramatic but still drives home my point.
In which direction do you think this stock went over the next four months?
Here’s the result…
Year to date, shares of Chubb Ltd. (NYSE: CB) are up another 8%, which is especially impressive given the S&P 500 is down 11%.
So you don’t need to spend countless hours digesting highly technical material to be able to glance at a chart and get an idea of the overall trend.
Of course, having a better understanding of both fundamental and technical analysis will make you a better investor and trader and it will help you fine-tune your timing in entering and exiting trades. And many charts are not this simple.
But with certain charts, you can at least get a general sense of the trend.
And that’s what has me concerned right now. Because for most investors, the current trend is not their friend…
Which way do you think this one is going?
This is the year-to-date chart of the S&P 500.
After hitting an all-time high on January 4, 2022, the S&P 500 has been making lower lows, which we don’t want to see. Friday’s action was ugly. If the index makes another new recent low below 4,150, investors could be in some trouble.
Here’s one more. Ask yourself whether it’s going up or down.
That’s the Nasdaq Composite year to date. It hit a new high back in November and has been slipping since. Should the index make a new low below 12,500, we should see stocks continue to slide.
Have some fun. Show these charts to your children or grandchildren and ask them which direction they think each chart is going next. Sometimes you don’t have to pass tough exams to get a sense of which way a stock or the market is going next. Sometimes you just have to open your eyes and your mind.
Good investing,
Marc