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Talking Points
- S&P 500 stalls at key square root relationship again
- Over 1935/55 needed to unlock further upside
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S&P 500 – Symmetry Rules
I am a big proponent of using square root relationships in the analysis of price. Many fundamental oriented people will say technical analysis only really works because it is a sort of “self-fulfilling prophecy”. In other words, so many people are watching something that it makes it work. That may be true for things like a 200-day moving average or the trigger point of a technical pattern, but I can tell you square root relationships aren’t being watched by very many and they have an almost uncanny gravitational pull on price at times. I believe there is a natural symmetry in the markets, despite what the academics tell us, and square root relationships just seem to be another clear manifestation of that. I am obviously not the only one to have picked up on this and I could rattle off a lot of other technicians that do, but people are often surprised to hear that the “fundamental” investment legend Sir John Templeton was a proponent of square root relationships – so much so he actually made it one of his investment maxims!
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Obviously, I am bringing all this up today because I have chart that is showing the S&P 500 responding very well to these relationships over the past few weeks. I actually wish I could show a few charts as the both the euro and cable have had important reactions recently from square root relationships, but I digress. In the S&P 500, the market has been respecting the 1935 area. This area marks the third square root relationship of the year’s low (from both January and last week). At the start of the month the index closing high was right on this level before it turned down sharply into last week. The move higher from last week failed yesterday almost exactly on the level again confirming 1935 as an important pivot. I am actually constructive on the market here after that successful back test last week, but traction over 1935/55 is needed soon to trigger the double bottom and set the stage for a more move higher. Back under 1894 and the near-term technical picture gets dicey again.
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--- Written by Kristian Kerr, Senior Currency Strategist for DailyFX.com
To contact Kristian, e-mail instructor@dailyfx.com. Follow me on Twitter @KKerrFX
