It doesn't matter whether investors like you and I believe in technical analysis or not. The majority of professional investors who trade vast amounts of money based on technical analysis are likely to affect everyone's portfolios in the coming weeks. The S&P 500 is testing a longer term trend line that, if the index breaks through, will result in considerable selling pressure in U.S. equity markets.
Like many investors, I used to sneer at technical analysis as the equivalent of astrology. Working on a major trading floor cured me of this conceit. The truth is, the vast majority of non-high frequency trading-driven money enters and exits the market based on signals from technical analysis.
Even the most conservative, technicals-hating, buy-and-hold portfolio managers do not execute the trades for their funds themselves. Once a Buy or Sell decision is made about a stock, the order is handed to a trading desk, whether it's an in-house or external one. Those traders almost universally use technical analysis to get the best possible price on the block of stock for the manager. In other words, no matter what the investment style of a portfolio, the money is likely to be placed or removed from the market using technical analysis.
Traders are currently obsessed with the 120-day moving average trendline for the S&P 500. Last week, the world's most important benchmark is tested the 120-day trendline for the seventh time since June 2013. For the seventh time, the market bounced right at the line. If the line continues to hold, the post-crisis equity rally will be considered intact by the traders. But if further volatility results in the market closing below that line, the believers in technical analysis will be inclined to sell stocks. At the very least, these active traders will stand aside and let equities fall.
SOURCE: Scott Barlow/Bloomberg
I am categorically, definitively not recommending that retail investors or traders should make any decisions based on technical analysis alone. That strategy is, in my opinion a recipe for disaster – at least, eventually.
But the people who in large part determine the short-term course of the markets will react to the success or failure of the 120-day moving average to support the U.S. equity market. And whether they believe in technical analysis or not, investors looking to navigate market volatility in the days ahead should look to this week's chart of the week for guidance.
Follow Scott Barlow on Twitter @SBarlow_ROB.