I analyze macroeconomic issues from a fundamental perspective, and I analyze market behavior from a technical perspective. Original macroeconomic analysis can be found here and both macro analysis and commentary can be found on my Caps blog. If you like or appreciate my analysis, please add yourself to my Following List

Saturday, December 19, 2009

Long Term Trendlines on the SPX

I was asked recently to give my opinion on a chart (20 year chart of the SPX) that had some trendline analysis and conclusions. And the chart was an arithmetic chart ..... yeah.

Let me again state my reasons for Why Arithmetic Stock Charts Are Worthless. Stock data on a linear chart improperly exaggerates the importance of moves at the top of the chart and improperly diminishes the importance of moves at the bottom of the chart!!. This is particularly problematic when doing long term trendline analysis, because an arithmetic chart will *NOT* preserve the relationship between price data separated by a large time gap, which as I explain in the link above is exponential in nature.

** There is an exception to this general statement, and it is the crux of AdirondackFund's analysis. He has done a lot of work with Gann, and arithmetic charts are critical to this analysis. Because there is a *very* specific way you must set up your templates to make them work. And when you do, very specific angle relationships show up that otherwise won't.

But in general an arithmetic chart with no special format will not give you proper relationships on a trendline analysis, and per my reasoning in my link above, I argue that it is invalid.

Does it mean I am right? No. It just means I have an opinion, but what I do is share that basis for my opinion. Your job is then to read my reasoning, see if it makes sense to you, and then decide if you will use it.

As a point of comparison, I analyzed the same data, the 20 year chart of the SPX, and examined using a log scale. Drew the same major long term trendline connecting the 1990 and 1995 bottoms. And you can see, it paints a very different picture from the bullish scenario:

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