Market Insights

The S&P 500 flew to new highs last week, and its technical patterns strongly resemble an earlier breakout.

First, consider this TradeStation chart study of the index in late 2012 and early 2013. Notice how the S&P 500 consolidated for several months near its 200-day simple moving average. It then bounced at both its 50- and 100-day moving averages.

Those are all longer-term trend indicators. The next signal was the shorter-term 8-day exponential moving average. Notice how the prices crossed above it and then continued to new highs. Notice also the tight consolidation period above the old peak three months prior.

The S&P 500 is at double the price level almost seven years later, but the chart looks very similar.

Also take a look at the bottom of both studies for a custom indicator — one of the many features that makes TradeStation so unique. This one plots the percentage distance from the 200-day moving average. Notice that it was about 5-6 percent above as the breakout occurred in December 2012. (It would proceed to double by May 2013 as the index soared to new highs.)

Chart Patterns and China Trade

Fast forward to the present and most of those chart patterns look similar:

• There’s a 3-4 month consolidation period.
• It at or above the 50-, 100- and 200-day moving averages.
• There’s a tight consolidation above the old highs.
• The 8-day exponential moving average marks the quicker trend.

Beyond the charts is another similarity: extreme fear melting. In late 2012, everyone was worried about a federal government shutdown and the “fiscal cliff.” President Barack Obama had just gotten reelected but opposition Republicans controlled the House of Representatives. Stocks flew to new highs as they reached an agreement.

This time, everyone has worried about the Chinese trade war. And once again the fears are fading. On Friday, state media in Beijing reported reaching “consensus” on a tariff deal with Washington. U.S. Commerce Secretary Wilbur Ross followed on Sunday by saying the Trump Administration would soon ease rules limiting technology sales to Huawei.

Interest rates are another way to measure those fear bubbles. Five-year Treasury yields hit long-term lows in late 2012 and this past September. Both times money returned to stocks as they rose. That’s another thing in common between then and how.

In conclusion, the S&P 500’s current breakout resembles a previous moment in traders’ memories. History might not repeat itself, but sometimes chart patterns do.