Indicator of the Week: Why Prior Highs Could Contain the S&P

The SPX is drawing close to its all-time high, which history suggests could offer some short-term resistance

Senior Quantitative Analyst
Nov 11, 2015 at 7:56 AM
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October was a great month for stocks, but now big-cap indexes are nearing what some technicians would consider a key level: the pre-pullback high. You can see in the first chart below that earlier this year, the S&P 500 Index (SPX) hit an all-time high around 2,135. It is now nearing that area again.

Reading my Twitter feed, it seems investors are predicting one of three things. One, it is setting up a potential double-top, meaning that we'll see another pullback soon. A second opinion I've seen is the rally is stronger into this level this time, so we'll break out higher now. Finally, a third prediction is that we pause here and move sideways until the seasonal December rally occurs. In other words, at this key level, we could see stocks go down, up, or sideways -- so, that's helpful to know. This week, I'll take a look at similar chart patterns in the past to see how the market behaved going forward. I guarantee it will be at least as helpful as my Twitter feed.


Quantified Results: To quantify results, I need to define exactly what I'm looking for. For this study, I went back to 1930 and found times the S&P 500 reached an all-time high, fell by at least 10%, and then re-took the highs, all within a year. Then I tracked how the SPX performed afterward. Below is a table of the returns over different time frames. For comparison, the second table shows typical index returns since 1955 (the year of the first signal). 

The sample size is small, as this has happened just 12 other times, the last time being in October 2007 -- a notoriously bad time to have gotten in the market. However, in those 12 occurrences, it seems the previous all-time high acts as some short-term resistance. The performances out to a month average a slightly negative return. The short time frame standard deviation of returns I thought was interesting. Those are lower than typical, suggesting low volatility or some sideways price action. 

Once you get to longer time frames, three-month to one-year returns, the summarized returns are closer to typical market performance. Because of the small sample size, the conclusions aren't ironclad. But this analysis does suggest the previous all-time high may act as some short-term resistance.  



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