Technical Analysis: S&P500 (SPX), REIT (IYR), & Copper Charts ~ market folly

Tuesday, May 26, 2009

Technical Analysis: S&P500 (SPX), REIT (IYR), & Copper Charts

We wanted to take our periodic look at some broad market charts real quick to see how the market is trending in the near-term. We use technical analysis as just one of the many tools in our investment toolbox as it helps tell us the "how" and the "when" behind entering and exiting stocks, while the fundamentals tell us the "why." (If you want to learn more about technical analysis, we'd advocate checking out the resource we've compiled of recommended technical analysis reading).

As such, we're going to take a quick peek at charts of the S&P500 (SPX), Copper ($COPPER), and some REITs (IYR). We have selected these three charts because the S&P is representative of the entire market, copper is often seen as a leading economic indicator, and REITs have caused quite a stir lately with their robust rally despite weak fundamentals.


Firstly, we'll start with Copper. Kevin has interestingly pointed out that Copper has been forming a symmetrical triangle pattern. As you can see with the red trending lines, a break of the trend in either direction can trigger a large move. Since the bulk of the recent action in Copper has been upwards, we'd expect this trend to continue. However, you still have to monitor things carefully as it could very well break to the downside.

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As we mentioned earlier, we monitor Copper since it is often looked at as a leading economic indicator. If things are being built globally, they more often than not require copper. As such, it has become a 'tell' if the economy is recovering or not. As you can see above, the metal has been trending upwards for the entirety of 2009 pretty much, which could be a favorable sign. The ultimate test is now a breakout above the recent resistance.


REITs are a touchy subject because there is so much research out there illustrating what a deathpit they will be in the years to come. Yet, they have rallied right in the face of those claims due to equity offerings and dilution out the wazzoo forcing massive short covering. The crux of the REIT matter is that many of these companies have massive debt loads and maturities coming due in the next few years. Couple that with the fact that overall, they are seeing declining FFO (funds from operations, a popular metric in REIT land), and increasing vacancies in their properties. If their cashflow is slowing and they have a lot of debt coming due, how will they survive? As of now, their plan seems to be to dilute shareholders with equity offerings to shore up their balance for the near-term, with no real long-term solution as of yet. So, with that in mind, let's take a look at the chart. We'll be using IYR as our proxy since it is the overall index.

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As you can see, REITs have been ripping higher over the past few months. We've outlined the uptrend with the light green lines. Each time the rally sells off, it finds support and continues higher. However, as we've illustrated with the bold red line at around $36, IYR definitely has some overhead resistance. Not only did IYR fail at that level the last time around, it also is an area of resistance from back in late 2008. Lastly, you've also got the 200 day moving average (downtrending thin red line) acting as resistance at around $37.50 as well. Overall, REITs have rallied hard but will have to rally even harder to breakout of this tough range. The lower bold green line illustrates the support IYR has around $22.50. So, it has essentially traded in a range of $22 to $36 over the past 6 months. Look to buy at the bottom and take some profits at the top. If it breaks out above all the resistance we just mentioned, then look out as this thing could really rocket higher.

Take note though, that we aren't really counting on this happenning. After all, the 200 day moving average is in an extreme downtrend, and rightly so. IYR overall is downtrending over longer time frames and the recent rallies have merely brought it back to its trendline resistance where it has typically sold off. So, we would wager that shorting IYR around $36 would be a prudent bet, allowing yourself the flexibility to then get long if the name breaks out above all the resistance. The trading range has definitely outlined a line in the sand for you to play with.

S&P 500 (SPX)

The market is struggling to break through its 200 day moving average, which is coincidentally the same level as the high for the year, made earlier this year in January. As we've twittered before, this area makes logical sense for some selling to take place. (By the way, make sure you're following us on twitter for market updates that we don't post on the blog). We've seen a massive rally and profit taking is not only healthy, but long overdue. This area also is a logical place as a starting point for the next big move, in either direction. If the market continues to fail at resistance, it could setup a big move to the downside. However, if it blasts through yet another area of resistance, it would mean we're going even higher. Point being, this could be a pretty important level.

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As such, it's time to practice the art of flexibility. But, that's nothing new, as we've been preaching that for a while now. In this whacky market, you've got to be flexible and nimble. Use the technicals to help guide you as to where the market will be going in the near-term. While the fundamentals are obviously still dreary, you have to respect the market action or you'll get your face ripped off. Case in point: the market rallying 16% over the past 3 months despite no real signal that we've solved our problems. And, as illustrated in the chart we posted last week, the market has had some wild swings over the past 2 years.

Irrationality is often the name of the game in the markets and you have to abide by her rules. After all, the market can remain irrational longer than you can stay solvent. That saying has stood the test of time for a reason.

So, it's certainly time to wait and see what the market brings us. No matter what direction she heads, we've got a solid gameplan now due to a quick check on the technicals. We also recently posted up some technical analysis on Gold if you're interested as well, as it looks like the metal could be building some support currently. And, last but not least, don't forget to check out our recommended reading list: Technical Analysis edition if you're looking to hone your chart reading skills.

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