Chart-based trading behind big market swings

NEW YORK - Support levels. Moving averages. Breakouts.

That strange language is being spoken more forcefully on Wall Street these days. It is the language of technical trading, which is helping to drive recent wild gyrations in stock prices.

Within hours, stock prices have been leaping and falling in 300 and 400 point bursts.


Technical traders all but ignore fundamentals, such as corporate profits or expected growth. Instead they rely on stock-chart analyses that signal when to buy or sell the entire US stock market.

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In the absence of clear signs about the economy’s direction, more of Wall Street is turning to technical trading. When the charts say “sell,’’ a herd of sellers emerges, magnifying declines. If prices fall far enough, another wave of technical selling is triggered and the decline is intensified. At some point, a threshold is reached where the charts say “buy,’’ and stock prices get whipped higher.

“You have to have some idea of earnings and multiples for fundamental analysis,’’ said James Masserio, the head of equity derivative trading at Credit Suisse. “But now there is essentially no clarity on future earnings for the next 6 to 12 months.’’

When traders can’t forecast the future, they turn to what has happened in the past. “Technical analysis at its heart is just a graphical representation of human emotion and psychology,’’ said Richard Ross, a global technical strategist at Auerbach Grayson. He says that price charts show that markets - and investors - follow reliable patterns.

Technical trading is based on the idea that price history alone tells investors all they need to know. Called chartists or technicians in Wall Street language, most investors who make decisions based on these strategies focus on the point level of the Standard & Poor’s 500-stock index, a broad index that represents about three-fourths of the total value of the US stock market. Traders who want to buy or sell the S&P index often use exchange-traded funds.


When evaluating when to buy or sell, chartists turn to a toolbox of more than 700 different indicators. Among the most popular are noting the moving average of the S&P 500 index over the last 200 days and pinpointing the levels where it seemed to stumble before moving higher or lower. A recent low is called a support level, and a recent high is called a resistance level.

Chartists think it’s a clear sign that the market is headed for additional losses when the S&P 500 index breaks past one of its recent lows. That happened last Thursday, when the index fell below 1,257. The S&P index had nearly touched this level - its closing price Dec. 31 of last year - during a sell-off in June. Passing through this support level signaled for many that the market had lost upward momentum. The index closed at 1,200 that day for a loss of 4.8 percent

Ross said that following the rules of technical trading would have saved investors a lot of money in the 2008 financial crisis. In what many technical traders considered a sell sign, the S&P 500 fell below its 200-day moving average of 1,324 the week of June 27, 2008. The S&P index remained near 1,300 at the start of September before it tumbled to 840 in October. It fell to a low of 683 in March 2009 before the start of the current bull market.

“Fundamentals have let investors down again and again,’’ Ross said. “Technical analysis doesn’t always work. But at the end of the day, you can’t deny charts.’’