I don’t want to keep beating the drum of the bears. I’m by no means a perma-bear, but recently I just keep seeing things that cause me to worry. Today I want to look at the longer-term (read: weekly) slope of everybody’s favorite index, the S&P 500.
Here’s what Stockcharts.com has this to say about the slope indicator:
The slope indicator measures the rise-over-run of a linear regression, which is the line of best fit for a price series. Fluctuating above and below zero, the Slope indicator best resembles a momentum oscillator without boundaries. It is not well suited for overbought/oversold levels, but can measure the direction and strength of a trend. It can also be used with other indicators do identify potential entry points within an ongoing trend.
On a weekly basis I like to use slope to measure the strength of a trend. I do so by using a 13-week exponential moving average crossover. The 52-week slope of the S&P 500 doesn’t cross below it’s 13-EMA very often, it’s only happened three previous times not counting the most recent crossover.
As you can see from the chart above, when slope begins to fall and breaks below the above mentioned exp. moving average, we typically notice that trouble isn’t too far off for equity prices.
It’s important to remember that like any moving average crossover, the slope (as in this case) could whipsaw back above, erasing any worry bulls may have. We saw this type of whipsawing action take place in 2005 and 2006 (not shown), keeping the overall trend in equities positive. It doesn’t feel like we are in the same type of price action as ’05 or ’06 but I’d be happy to be proven wrong.
We’ll see if bears take further control of equities, knocking the weekly slope of the S&P lower or if bulls are able to hold their ground and maintain the advancing trend. As always, time will tell.
Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+.
