ZC. #5: Zeahl's Edge: Inflection Point.
A simple look at where we are.
Intro
The stock market is a complicated, living, breathing organism. It’s often easy to forget when you’re four hours deep into charting and analysis, that the market is merely translating human behaviour into prices. Human behaviour in the market comes in several forms from the highly irrational to those so calm they are almost in comatose.
Analysis
Analysis is a necessary part of making decisions, especially when you put money on the line. From Bloomberg to CNBC you’ll find a myriad of analysts giving their opinions and thoughts about where the market is heading. The reality is that you need to understand what is driving current price movements to identify the future price movements. That’s where the money is made.
Dumbing it down
Amidst the hundreds if not thousands of charting tools, papers, indicators and oscillators, it’s easy to get lost and create a variety of different outcomes. This can result in the famous ‘analysis paralysis’.
Sometimes to help me understand the future, I like to look at the present in it’s simple form. This leads me onto two charts that despite not having an obvious outcome, gives me clarity as to where we are.
Inflection Point
Inflection point: (in business) a time of significant change in a situation; a turning point.
Below are two charts, the S&P500 and the Dow Jones. these two indexes are two of the oldest surviving markets, giving as a significant insight into market behaviour over the last century.
The candles on both charts represent 12M of price movement and most importantly, both are logarithmic charts. Most charts you see are linear. Logarithmic charts provide a better insight into long term price action as the numbers are not equally spaced distance-wise. Rather than price, they are equally spaced in terms of percentages. For example, the distance between 10 and 20 is the same as the distance between 20 and 40.
This basically means that a price bar representing a 50% increase will be the same size regardless of at what price point it happens.
So why inflection point? Well, when looking at the charts below it’s easy to see how major moments in market history have coincided with the higher, lower and median points of the channel. This means that at the channel highs, price has corrected and at the channel lows, price has increased. Near the channel middle, price has reacted to either correct or flip into support.
You can see from the two charts dating back to the late 1800s that the current price sits at the channel highs. The S&P is almost sitting on top. Significant!!
So what is this telling us? Two things:
Prices are expensive. In fact prices are the most expensive they have ever been. It doesn’t mean they are overvalued though. Just, expensive.
We are at a point where no matter which direction the markets go, we are going to see significant volatility.
You see, I’m not predicting a correction necessarily. The point of these charts is to understand where we are and what is clear is that we are at a point in history where usually, at these channel highs we get a significantly sized correction, usually 50% or more. Nevertheless however, as we can see with the S&P pushing beyond the channel high, it is possible that we push beyond the century long channel. What does that mean? Huge expansion! Unimaginable expansion.
This is why inflection point: (in business) a time of significant change in a situation; a turning point. There are two possible outcomes, both leading to a significant change a situation. Both a turning point.
Whether for better or worse is yet to be seen.