Technical Analysis update for November 2023

As regular 80-20 Investor members know, periodically I like to look at what technical analysis suggests about where key markets might be headed next. It's been 6 months since I last wrote a technical analysis piece. Therefore it's an opportune time to take a look at how key markets have fared so far in 2023 and where they may head as we enter the final months of the year. It may also give insight into whether the recent equity market weakness will reverse or get worse?

Remember, technical analysis is not a crystal ball but instead gives you a range of possible outcomes and levels to watch. In volatile market conditions, technical analysis tends to prove particularly useful and traders and professional investors start to pay greater attention to it.

As ever, I like to recap what technical analysis is and how it works. I always advise investors not to try and time the market because they will never get it right. However, there's nothing wrong with trying to determine a range of possible future outcomes within investment markets. Think of it like a weather forecast. It’s not 100% accurate but it will give you a better idea of whether a storm is on the horizon or when one might blow over. Technical analysis is the nearest thing we have to weather forecasting in the investment world.

What is technical analysis? - A recap

For those who don't already know or have forgotten here is an explanation of what technical analysis is:

Trying to predict the future of the stock market is akin to reading tea leaves. Personal predictions are almost always clouded by prejudices that reaffirm what we ‘want’ to happen rather than what is ‘most likely’ to happen.

That is why one objective method is to use technical analysis to try and judge likely outcomes. So what is technical analysis? One line of thinking is that stock markets are driven largely by human behaviour. At the simplest level you could argue that fear and greed drive a lot of investors’ actions. Let’s say that an opportunity presents itself and some investors jump on it and buy the shares in question. The demand then drives up the price. More investors jump on the bandwagon looking to profit. Then at some point the tide turns (fear sets in) as people think the price for the shares is looking expensive and so people start selling. More and more people start selling to take profits and the price falls. At some point the price falls until others think the shares look cheap and start buying, outnumbering the number of sellers. Again demand outstrips supply and the price goes back up.

This see-sawing explains the movement you see in stock market charts such as those below. The price at which investors start bailing and selling the shares is called a point of resistance while the point at which they pile in is called a point of support.

As such there is a surprising level of predictability to human behaviour. In terms of the stock market that means when the price goes through historic points of resistance or support it can indicate a new unfolding market rally or collapse. Why does it do this? Part of it will be because traders trading in millions of pounds will use these points of resistance and support to trigger trades. Yet for a lot of investors they might not even be aware of these inflexion points. They simply are reacting to how other people in the market behave. Put it this way, when stock markets fall you feel tempted to sell, right? Also once it starts to rally, you are tempted to jump in? That’s why these patterns have a tendency to repeat.

Some investors and traders swear by it and trade solely using technical analysis. I don’t fall into that camp. I view technical analysis like a road map drawn by someone who has already completed a journey to somewhere near where you are planning to drive to. The road map won’t take you exactly to your intended destination, nor will it be entirely accurate. However, it will give you a better sense of what to expect. Then if you decide you like the look of a particular market you can use 80-20 Investor’s ‘Best funds by Sector‘ data to choose an actual fund to invest in.

Latest technical analysis

There are different types of technical analysis, however, I find the most useful guide is to simply highlight the points of resistance and support, as I've done previously. So below I provide technical analysis, looking at areas of support (the green lines in the charts below) and resistance (the red lines), on the key global equity markets and the pound/dollar exchange rate. Click on the charts to enlarge them.

US stock market

Last time (May 2023) the S&P 500 had broken out of its downtrend and back above its 200 day moving average, but was struggling to break above the 4100 level. My latest technical analysis chart below shows that eventually the S&P 500 did break out.

After breaking above the short-term 4170-4200 resistance zone the S&P 500 eventually tested and broke above the 4300 resistance line, which had proven difficult on a number of occasions over the previous 12 months. Eventually the rally from the October 2022 low pushed the S&P 500 to 4588, which has been a strong line of resistance in the past as shown in the chart below. The S&P 500 was in the grips of a bull market rally and a pullback was somewhat inevitable. We've since experienced a 10% correction and crucially the S&P 500 has fallen below the October 2022 uptrend line and also its 200 day moving average (the purple line). These are both bearish signs for the S&P 500 and investors need to see the index swiftly move back above 4300 to break the recent downtrend and finally attempt a push above 4588. Right now a "sell the rip" mentality (as opposed to "buy the dip") has taken hold of the index since August.

The 4170 line will be an important one in the short-term if the market is to gain momentum to push higher. Currently the index is trying to recapture it. On the downside a continued move below 4080 could see a move down through 4000 and towards 3900.

UK stock market

The chart below is the chart that I published in my last technical analysis article back in May. At the time I wrote:

"...that although [the FTSE 100 is] still above 7750 it is in danger of forming a head and shoulders pattern with the peaks from early February and mid-January...such patterns are often seen as signals that a bullish trend is reversing. If this were to be the case then a move back below 7750 is possible".

Here is the updated technical analysis chart taking into account the market moves since May 2023.

As you can see the FTSE 100 did roll-over and ultimately broke below 7500 which historically often leads to an aggressive move back towards 7300. Once again we saw this happen. The FTSE 100 found a level of support at 7257 which held in July and August. This marks the 2023 low and the FTSE 100 rebounded strongly from there at the second time of asking but ultimately faltered around 7670 and revisited the 7300 level. It means that we can't rule out a re-test of the 2023 low once again.

There is an argument that the FTSE 100 is stuck in a wide trading range between 7670 and 7257 and consolidating before a significant move higher or lower. However, the FTSE 100 has made a series of lower highs in 2023 meaning that the outlook remains negative for the FTSE 100 in the medium term. If we zoom out, only a strong move above 7670 and then 7750 would put a new all-time high back in play but there is significant resistance on the way up.

Looking downwards, a move below the 2023 low could see the start of a more significant move lower. If it occurs look for 7250 to offer support but failing that then 7150, 7000, 6950 and 6900.

Japanese stock market

Last time the Nikkei 225 had just broken out of a triangle pattern which, as I wrote at the time, often results in explosive moves higher or lower. The move higher was in its early stages and I pointed out that it wasn't until it broke above 29250 and 30500 that this market would get interesting.

The chart below was the chart published in May 2023...

Now contrast it with the latest technical analysis chart...

...and you can see that we did indeed get the explosive move higher and once we burst above 29250 and 30500 the Nikkei 225 went on to make a 23-year high. Sometimes technical analysis works brilliantly sometimes it doesn't, This was one of those times when it worked brilliantly. The chart below is a zoomed out version of the above to give some wider context to the moves.

The Nikkei 225 had been locked into a sideways trading pattern for most of 2022 and 2023 but the breakout in May changed the dynamic of this market into a bullish one. However, you can see that since its high in early July, the Nikkei 225 has entered a potential downtrend, as highlighted by the downsloping channel. Despite this, the Nikkei 225 remained above the green upturned line that dates back to the start of 2023. However, in the last few days this was tested before the index found support at 30500 and rebounded over 2.5% in a single day, recapturing the 2023 uptrend.

The 30500 line will be key in determining whether the index can consolidate at this elevated level before pushing higher. A break below 30500 would put 29250 back in play and then ultimately the 26000-28250 channel once again. On the downside, 26000 is important otherwise a revisit to the March 2022 low of 24717 is still a possibility and then onto 24000 (which aren't shown in the above charts for simplicity). Looking higher, 33753 needs to be broken if we are to have a chance of breaking to the all-time high of 38,915.87 achieved on 29th December 1989.

Pound vs Dollar

The pound has been on a fascinating ride since my last technical analysis piece. This is the chart I published last time when the pound experienced an unlikely turnaround in fortunes, thanks to the market's differing outlooks for monetary policy in the UK and the US.

But the rebound had stalled at $1.24 and hadn't broken out of the downtrend that started in 2021.

Jump forward to today and the first thing to note is that the pound did break out of its downtrend and even broke above the important $1.30 level, a level not seen since the first half of 2022.

 

However, if we zoom in and focus on what's happened since its recent peak, the pound has been on an almost relentless decline once more (providing a nice currency boost for UK investors investing in the US). The move has formed a clear downtrend pattern as shown below. The pound found support at $1.207 but has yet to break out of its downtrend. If we break below $1.207 and the psychologically important $1.20 level then we could swiftly revisit the 2023 low near $1.185. The pound has a lot of work to do if it is to break out of this current negative pattern with $1.231 and then $1.24 being important hurdles to overcome.