Monday Morning Outlook

Monday Morning Outlook: What the 'Keep It Simple' Model is Saying

Major equity indexes retreated from key round-number areas last week

by 3/30/2015 8:30:39 AM
Stocks quoted in this article:
"From a technical perspective, the biggest risk to the immediate term is that multiple equity benchmarks are again trading around key round-number areas simultaneously, which was also the case earlier in the month when weakness quickly followed. In other words, we have seen markets become unstable in the early stages of overtaking a new round-number level, until they don't. With a key European benchmark overtaking a new millennium level for the first time, it will be interesting to see if anxious profit-takers take center stage in the days ahead, and whether or not this impacts world markets, particularly the U.S."
-- Monday Morning Outlook, March 23, 2015
"Simplicity is the ultimate sophistication."
-- Leonardo da Vinci

One looks back at last week and asks, "Is it really that simple?" Amid a multitude of complex computer-trading programs designed to trade with an edge, perhaps the most simplistic model triggered a "sell" last week, after multiple equity benchmarks in the U.S. reclaimed round-number levels that again preceded instability. And in the case of the London FTSE 100 (UKX - 6,868.30), its first-ever venture above the millennium 7,000 level was greeted with sellers.

We saw various explanations for the selling -- weaker-than-expected economic data, the Securities and Exchange Commission (SEC) indicating that oversight of high-frequency traders will increase, or a spike in oil attributed to Saudi Arabia attacks on perceived threats in Yemen. However, from a technical perspective, the common denominator was sharp selling from round-number areas after multiple equity benchmarks in the previous week climbed above key millennium marks as follows:

  • London's FTSE 100 -- 7K level

  • Dow Jones Industrial Average (DJIA - 17,712.66) -- 18K

  • Dow Jones Transportation Average (DJT - 8,700.34) -- 9K

  • NYSE Composite (NYA - 10,875.14) -- 11K

  • Nasdaq Composite (COMP - 4,891.22) -- 5K

  • Wilshire 5000 Index (W5000 - 21,846.79) -- 22K

Not to be forgotten, the S&P 500 Index (SPX - 2,061.02) failed again in the 2,100 century zone.

As we said last week, equity markets have had a tendency to become unstable during early stages of a rally above key round-number levels, until finally such instability around these areas disappears. Admittedly, it is the latter that generates complexity, as we have witnessed many instances in which these benchmarks eventually take out round-number resistance for good. But, as we saw last week -- not this time.

COMP -- unstable after moves above 5,000 this month

30-Minute Chart of COMP since March 2

As we move into this week's trading, the "keeping it simple" model is now saying "buy." In other words, loyal readers of Monday Morning Outlook are fully aware of how round-number, year-to-date percentage returns have generally marked key pivot areas. With that said, multiple equity benchmarks, including the DJIA enter this week at potential year-to-date (YTD) support levels, which could be opportunistic for short-term traders. Moreover, the S&P MidCap 400 Index (MID - 1,508.51) pulled back to a potential round-number support zone at 1,500.

The Google Finance graph below that displays YTD percentage returns for the SPDR S&P 500 ETF Trust (SPY - 205.74) and DJIA is a nice visual for the importance of YTD breakeven levels having a tendency to mark important pivot areas this year. Does it pivot every time? Certainly not, and we witnessed this in February. So, if you play the "simple" trade and go long, ensure you have a tight leash in case we break away from the simple, and a breakdown occurs.

YTD Breakeven -- Importance

DJIA and SPY Since January 2015 With YTD Breakeven

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