Recent declines in global equity indices throughout much of August – mid October seemed to create a panic throughout much of the financial media. It is this exact reason that at Dorsey Wright we believe having a systematic based process allows us to remove the human emotion and keep a consistent game plan when markets get turbulent.
One of the most simplistic ways in helping monitor supply & demand developments on traditional point & figure charts is keeping an eye on how price reacts when long term trendlines are approached. Keep in mind, where as many technical analysis methods draw trendlines in numerous ways, the point & figure methodology adheres to a much more strict process on when and where they can be drawn. Furthermore, due to the way point & figure charts are constructed, each trendline can only be drawn at a 45 degree line. This is an important concept to grasp because it keeps the idea of drawing trendlines more consistent than many other charting methods.
Remember, trendlines aren’t necessarily producing a buy or sell signal (we use our RS matrices for these) but should a long term trendline be broken it would likely lead to a declining RS reading for that particular market.
Below we inserted traditional point and figure charts for the S&P 500, German DAX, and the MSCI Japan ETF (EWJ). Given the fact these are three of the most commonly discussed equity markets in the world, we thought it would be interesting to take a look at each one of them and discuss some recent technical developments.
SPX: Point & Figure
We can see below how the recent declines in the S&P 500 tested the uptrend support line which has been intact for an extended period of time This area of demand helped provide the market with an underlying bid which thus far has produced a very sharp rally from the lows. Developments such as this can also be helpful in helping spot pockets of relative strength when compared to other global indices which are unable to find a bid at major support trend lines.
German DAX: Point & Figure
The German DAX chart shows a similar set up as the S&P 500. The market no doubt experienced a sharp sell off, but nevertheless held the longer term uptrend line. Another example of how keeping it simple can help investors stay the course and keep their longer term investment objectives in focus. There is no doubt European equities have been an under-performer in 2014, but holding a major level such as this can be a near term positive.
iShares MSCI Japan ETF
To round things out, lets take a look at one more global market (Japan) to see if it experienced a similar move. In looking at the iShares MSCI Japan ETF (EWJ) below, we can see yet another major support trend line was tested and held on the previous pullback in equity prices. This isn’t to say share prices of the EWJ haven’t experienced some downside volatility, but it does confirm the market (thus far) has been able to find a bid at an important level where demand has shown up in the past.
Conclusion:
The above charts are just a fair reminder of why we adhere to the investment concept of keeping it simple in order to stay the course and follow our game plan. A systematic process which removes human emotion is a major benefit when it comes to following a consistent investment philosophy when markets get turbulent. Certainly there were many global indices around the world that had similar set up’s (FTSE, DJ Euro STOXX50, and the CAC40) which were unable to hold there longer term uptrend lines. It will be worth monitoring these markets going forward to see how their relative strength rankings compare to their peers which were able to hold their respective trendlines. Similar to the price of most everything around the world, supply & demand are the factors which ultimately move stock prices!
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