Using Moving Averages and Chart Pattern identification,  I will show you how to perform a detailed long term analysis of the market and its general direction.

I have chosen the “Technical Approach”, and will be evaluating the S&P500 index, this is a good barometer of the rest of the US Market, and is a standard approach for many technical analysts. All of the lessons in this 3 part series can be reused to evaluate individual stocks.

To help review the history and direction of the market, I have used the following.

• A monthly Logarithmic Chart
• Moving Averages 10, 20, 50 & 200 month.
• Trendlines

TeleChart2007 chart courtesy of Worden Brothers, Inc.

To start analysing an index it is best to at first review the long term and then drill down into weekly then daily charts, to look at the market action.

1. Point A shows us the top trend line that connects the 1980 high with the 1987 high, and the 2000 high. Don’t forget the more touches on a trend line and the longer the time periods the more valid it is considered.
2. Point B shows us the bottom trend line touching the troughs, connecting the 1982 low and the bottom of the Year 2002 recession low. Note if you had used this trend line as a market indicator and sold your stocks at this point, you would have avoided the vast majority of the devastating 2008 / 2009 Crisis.
3. Point 1 shows us where the 10 & 20 month moving averages cross (blue lines & green dashed line), using these indicators would have signalled a good point in 2001 to get out of the market and preserve any gains you may have accumulated in this dizzy period of greed.
4. Point 2, shows us when the 2000 crash was over, when the 10 & 20 moving averages cross up through the 50 month moving average.
5. Point 3 is extremely interesting as is shows us the exact point where the price cuts directly through the B Trendline heading down to confirm the crash of 2008. incidentally this happens just a few months after the 10 & 20 month moving averages cross (blue & green dashed line). Also notice that shortly afterwards the price broke downwards through the 200 moving average, never a good sign.
6. The Double Top. On this chart we can easily see that a “Double Top” has formed from the 2000 high and the 2007 high. The Index could not break through this level of resistance at 1576. Since the second top in 2007 the market halved in value, with devastating consequence to investors.
7. Point 4 shows us where we are today. I have drawn a trend line backwards from this point. This line shows us a level of support in the 1998 pullback. It is also a level of resistance for the market in 2002 & 2003. When this resistance was broken the market went on to achieve its 2007 high.
8. So where are we now. We are directly under the Trend line, essentially under overhead resistance.

So what does this all mean?

Well it could mean it is decision time for the market. Do we push through the resistance and move to higher highs, or fail to break through and retrace, gather strength and try again.

To understand further, what the market has in store for us we need to zoom in on the data, to a weekly chart. See Market Analysis Part 2.