Keep it simple
Photo bySebastian SvensononUnsplash
Investing favors those that are in it for the long run. But that doesn't mean you can't gain an edge by watching charts.
I use charts to help my investing decisions, even though I invest for the long term and don't short-term trade.
Unfortunately, looking at charts can get overly complicated real quick. That's why I kept it simple. I've found looking only at two charts with very few indicators can help capture good entry points.
S&P 500 $S&P 500(.SPX)$
Most of what I invest in these days is the S&P 500. (via SPY)
Therefore, the most important chart for me to look at is the S&P 500.
Below is a chart of SPX.
Image from TradingView on 1.18.2023
The black horizontal line is the low from the freefall earlier in 2022 — around 3,500.
After peaking in early 2022, the S&P has been in adowntrend ever since. The blue diagonal line showcases that it has struggled to reach its previous high the past few times it started going up.
For me, I wouldn't invest when it's near the blue line. The current trend is downward, so any price near the blue line means it will likely fall.
I like to use this chart to see if the S&P is in a long-term downtrend or uptrend, as well as see what the short-term movement is.
This chart, along with the one below, are my guides for when to invest.
VIX $Cboe Volatility Index(VIX)$
The second chart needed is for the VIX, a volatility index.
Known as theCboe Volatility Index, it is a real-time index that represents the market's expectations for the relative strength of near-term price changes of the S&P 500 Index.
A good way to remember the VIX is that it typically moves opposite the market. When VIX is up, the market is down. And vice versa.
Below is a chart of VIX.
Image from TradingView on 1.18.2023
For all of 2022, it has traded in a pattern, almost entirely between the top and bottom black lines of 35 and 18.
Agood approach in 2022would have been to sell the S&P when the VIX is around 20 and buy when the VIX is around 30.
All my investing these days is long-term; I don't do anytrading. But I still find myself checking the price of both the S&P 500 and the VIX daily.
Before placing any large buys, it's helpful to check where VIX is currently trading. It was hovering above 18 these past few days and is up to 20, signaling the market may sell off these new few weeks.
Another View Worth Considering
It's generally accepted that themarket goes up in the long term, which would imply looking at charts is unnecessary. I still think it's worthwhile to spend some time looking at them.
Another, even longer term, chart to look at is the S&P 500 again.
Below is a chart of SPY, but every candle is a month, and the chart goes back a decade. Also added are two simple moving averages; a 10-day and a 50-day.
Image from TradingView on 1.18.2023
The S&P has been above its 50-day average nearly every month since 2012. The only month it closed below the indicator was March 2020, when lockdowns were implemented, and the market was in free fall.
After that, the market rebounded to new highs. Back in October 2022, the S&P 500 dipped below the 50-day average momentarily but was able to close above it.
It will be interesting to see if this indicator can maintain its track record in 2023.
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