Stick to the Basics

Last week, I attended and spoke at the CMT Association’s Mid-Winter Retreat in Tampa, Florida. As with all CMT events, Ralph Acompora was there. Ralph—popularly known as the Godfather of Technical Analysis—is a treasure trove of stories when he’s on stage.

I’ve heard Ralph speak hundreds of times. I even took his class at the New York Institute of Finance back in 2000. One thing has remained constant: Ralph sticks to the basics. He talks about trend, relative strength, and confirmation. Pretty simple.

S&P 500

After consolidating since October, the S&P 500 closed last week at a new all-time high. For all the fancy math and computing power over the years, price is still the first, and most basic, input for trading and investing.

Looking only at price, it’s hard to be anything but bullish as the trend moves from the lower left to the upper right. The same goes for the 60-week moving average.

Source: Optuma 

NYSE Advance/Decline Line 

Counting. It does not get more basic than that. Count how many stocks go up and how many go down each day. If more are going up than going down, that’s bullish. We can add a moving average, to smooth the trend, and see that it is also rising.  

Source: Optuma 

Dow Jones Transportation Average 

This chart sparked plenty of conversation at the conference. The Transports have ripped higher from a four-year consolidation above a rising 27-week moving average. 

The concept of moves in the Transports confirming moves in the broader market was introduced more than 120 years ago. It’s simple: we want agreement between the companies that make “stuff” and the companies that ship “stuff.” 

Our economy has changed since the early 1900s, but this basic market principle still holds. 

Source: Optuma

The Mag Seven 

Another hot topic: the market’s biggest stocks. Bears argue that the market can’t make much progress without them. Fair point—but these stocks aren’t falling. They’re consolidating. 

Source: Optuma 

S&P 500 Equal Weight Index 

If the Mag Seven is consolidating while the rest of the market looks like this chart, I don’t see the bear case. 

Source: Optuma

Final Thoughts

Markets thrive on simplicity. Strip away the noise, and three pillars remain: price is making new highs, breadth is improving, and key averages confirm the move.  

Leadership may be consolidating, but the broader market is doing the heavy lifting. 

Dan Russo, CMT

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