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Call a chart of market tops and bottoms

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The One Chart That Calls Market's Tops And Bottoms

CNBC’s Jim Cramer sometimes highlights Fibonacci queen Caroline Boroden’s charts. She uses the 5-day (blue line) and 13-day (red line) exponential moving averages or EMAs to show the market’s up and down trends. When these lines cross, it tends to indicate that the market has bottomed or topped and may reverse direction. Note that while this chart shows recognizable patterns, none of the charts are great for investing.

When the 5-day is above the 13-day, the market is moving higher and tends to maintain that trend until the lines cross. The downside is the same. When the 5-day is below the 13-day, the market tends to decline.

Currently on a downward trend

On Friday, the S&P 500 closed at 4,131.93. Currently in a downtrend with the 5-day SMA at 4,198.83 (blue line in the chart below) and the 13-day SMA at 4,249.07 (red line).

Looking at the chart, the two lines appear to have crossed on April 20th and 22nd. One thing to note is that even though the two lines crossed on the 20th and diverged slightly on the 21st, they crossed again below the 13th day when they moved 5 days later. Just because they cross does not mean the trend has reversed.

The gap between the two lines narrowed last Wednesday when the S&P 500 gained 103 points. However, Thursday’s drop and Friday’s 155-point drop widened the gap again.

When looking at the first four months of 2022, the two lines clearly show about eight upward or downward movements.

Using intersections for short-term trading decisions or investment strategies can be very challenging, but when a trend is firmly in place, it can help decide when to buy, when to sell, or when to do nothing.

The 2019-2021 chart shows a similar pattern

Looking back at the previous three years, a similar pattern emerged.

Short-term support could be broken on Friday

On Friday, the S&P 500 closed at 4,132.93, down from its Feb. 23 close of 4,225.50. While Friday’s session low of 4,124.28 was not lower than the Feb. 24 session low of 4,114.65, it was less than 10 points or 0.23% higher. If the downtrend at the 5-day and 13-day EMAs continues, the index will lose its short-term support.

Worth Charting sees another gap at play

Carter Braxton Worth is the founder of Worth Charting and a regular on CNBC. He focuses on the market as a technician and has been chief market technician for nearly 20 years at Oppenheimer, Sterne Agee & Leach and Cornerstone Macro before starting his own company.

In a chart emailed by Worth on Friday, he wrote: “The unfilled gap of 4020.63 a year ago (April 5, 2021) is ‘working’.” He emailed about 11 a.m. Friday. Sent to it, the S&P 500 was around 4,215 at the time. It ended up dropping another 82. He added, “Our thesis remains that the aforementioned gap will be filled (at least), which means the market has moved from Jan. 4 to The daily peak was down 16.56%. ” The blue line indicates that the blank is filled, and the red line indicates that the blank is not filled.

The chart also shows a head-and-shoulders pattern, three red inverted U-shapes, which are not good for investors.

The S&P 500 P/E multiple has fallen sharply

John Butters, senior earnings analyst at FactSet, released a weekly report on the S&P 500. One of the charts he often includes is the index’s 12-month forward P/E multiple. This week’s chart shows that the P/E ratio has steadily declined from a high of 21x to 23x in the second half of 2020 to its current level of 18.1x.

While 18.1 times is lower than the 5-year average of 18.6 times, it is higher than the 10-year average of 16.9 times. With interest rates still low and earnings growth impressive, it’s no surprise that the index’s price-to-earnings ratio remains elevated. It’s worth noting, however, that a handful of large tech stocks trade above that average, and a good portion of the rest of the index trades at 15 times earnings or less.

With the Federal Reserve on the verge of raising rates and shrinking its balance sheet, it’s no surprise that the S&P 500’s price-to-earnings ratio has fallen. One big unknown about how much it could fall is the Fed’s aggressiveness in tightening policy. Unfortunately, even the Fed will take at least a few months to know what it will do.

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