Stock Market Technical Analysis Finds Winning Trades


Simpler Trading Team

8 min read

Simpler’s traders understand that we are experiencing an agitated, choppy market – complete with unsettling geopolitical turbulence and confusion from interest rate hikes.

This market requires a solid understanding of stock market technical analysis.

As airplane pilots understand that encountering unexpected, changing winds is part of the necessary skill set, traders should be prepared to handle the disorder of a testy market. For traders, like pilots, there are times to use changing winds to find a better advantage and times that require simply staying on the ground.

(Check out the free video, above, for insight into trading this changing market.)

Stock market technical analysis guides traders

How do traders know when to fly on or stay grounded?

The team at Simpler Trading relies on stock market technical analysis – using trading charts and the signals they provide to guide their decisions. 

It is essential to rely on proven systems that have worked over time through various markets and economies. Traders need to focus on the technical analysis of stocks and have an understanding of the type of market they are currently trading.

Recent markets have changed considerably since bottoming in March 2020 – and then topping in November 2021.

The broader market today presents a demanding environment that requires trading fundamentals and systematic valuations of stocks, especially stock market technical analysis.

S&P 500 reveals trades in broader market

As traders look at the daily price chart of the S&P 500, the index that tracks the performance of 500 large companies listed on U.S. stock exchanges, the chop is clear and defined. Traders need to zone in on the broader market to succeed and outperform the markets.

Zone in by watching key signals on stock charts.

Watch for the S&P closing above the 50-day simple moving average (SMA). This 50-day moving average is what Simpler’s traders refer to as the “line in the sand.” This is ideally the key level traders want the markets to be trading above.

Some of the momentum indicators – found in most stock trading platforms – are showing a more cautious view of the markets. For example, the relative strength index (RSI) is in negative territory as well as the stochastics – giving mixed signals traders are monitoring closely:

  • Not to be confused with relative strength, the relative strength index (RSI) is a technical indicator used in the analysis of financial markets. It is intended to chart the current and historical strength or weakness of a stock or market based on the closing prices of a recent trading period.
  • Developed by George Lane in the late 1950s, the stochastic oscillator is a momentum indicator that uses support and resistance levels. The term stochastic refers to the point of a current price in relation to its price range over a period of time and this method attempts to predict price turning points by comparing the closing price of a security to its price range.

Stepping back to look at the weekly chart of the S&P 500 provides a longer-term outlook as it relates to what traders can anticipate moving forward.

Simpler’s traders highlighted the characteristics of the S&P 500 coming out of the last three bear markets – years 2008-2009, years 2018-2019, and then the pandemic-induced 2020 bear market. This revealed key characteristics as we came out of each of those bear markets. As it relates to a longer-term outlook, the RSI turned positive as well as the faster momentum of the stochastic.

Taking a look at where we are currently, the S&P 500 did turn positive on these outside performance momentum indicators. However, the market stumbled as the S&P entered a pullback and the RSI slipped back.

This is certainly an area that traders at Simpler are keeping a close eye on – as all traders would do well to do. This should present a general feel for where the broader markets stand and where they might be headed.

Technology stocks in Nasdaq index under fire

As traders study the technology-laden Nasdaq index, a daily price chart shows tech numbers are not inspiring the market. The tech sector was the “darling” throughout the pandemic.

Now, the technology index does not present itself to be as healthy as the S&P 500. 

After breaking below each of the key simple moving averages, the RSI and stochastics indicators are revealing negative territory for the Nasdaq. Naturally, tech growth stocks are running into trouble.

Accompanied by rising interest rates, it’s important to determine where the strength is in the technology market. In general, interest rates have a negative impact on technology stocks.

Simpler’s traders are focused on where the relative outperformance lies within the Nasdaq. A bit like fishing, looking for top performers in the sectors is going to reveal an ideal place to fish. When traders identify where the money flows, they can potentially identify stocks that will go on to outperform the broader markets.

Traders can still consider the varying sectors in the S&P 500. At the forefront there are defensive sectors staples – utilities, energy, value stocks, and materials. These are currently the four horsemen as far as areas that are outperforming.

Back to the technology sector, the Nasdaq appears to be in a declining phase. Banks in the financial sector have also been getting hit with an inverted yield curve which could signal a market decline.

In the broader markets, traders need to have the ability to find – and take advantage of – stocks that are in stronger areas.

Finding leading stocks, strong sectors

Traders who are working to outperform the broader market can focus on the strength within the leading stocks and strongest sectors.

The energy sector certainly has led the markets this year. Traders that follow the markets closely know that this has been the number one top performer year-to-date and was the strongest sector at the beginning of January.

This was when traders identified a downtrend reversal in the broader market and were able to add stocks from this industry group. This group has since outperformed the broader markets.

An example of one of the holdings was identified as Pioneer Natural Resources (PXD) just as that energy group was turning bullish. This stock is still in a confirmed uptrend despite a volatile background.

There will be areas of outperformance traders can take advantage of despite chaos in the overall market. Not all energy stocks have participated in the run-up. When viewing a chart such as the energy sector, traders may assume it would be easy to pick a winning stock – that one stock that goes on to outperform. But the process isn’t as simple as it seems.

Philips 66 (PSX) did join the run-up in the beginning, but has since waffled with a return that is nowhere near the broader industry group.

What are some ways traders can identify and focus on names that are going to outperform?

It is important that traders focus on consistency in strategies for getting into trades with the potential for big winners as well the exit strategies they use when the trade doesn’t go as planned. This is a critical part of the process to accurately assess the sectors.

The historical precedence determines that almost 50 percent of a stock price – appreciation or deterioration – is attributable to the industry group of that stock.

Trading styles are an asset to strategy

Every trader has a style – short-term, intra-day, or even with a longer-term core portfolio – that they use over the course of time.

When traders capitalize on this personalized trading style, they can then capitalize on moves in the faster-moving stocks. Once stocks enter into an uptrend, traders can add power to the trading portfolio by capitalizing on these faster-moving names.

By understanding the trading time frame each trader relies on, the historical charts can reveal where these movements take off and when.

Traders who study each of the market cycles and identify common characteristics in winning setups learn that market cycles have a strong tendency to repeat. This is an interesting key fact as it relates to the broader markets that include the down periods of the bear markets as well as during bullish runs.

When traders study market cycles throughout previous decades, it becomes evident that history repeats itself. As traders look back into the full market cycles of the crash of 1929 and the turbulent 1970s, the tough cycles reveal consistency throughout.

These periods of stagnation tell traders what really worked and what didn’t. Even with everything new that has been added, traders are able to take a deep look at how market participants respond to upheaval in the economy – even during wartime and interest rate hikes.

Find setups, strategies among peers

Traders at Simpler Trading know that sharing successful setups and strategies makes them better able to stay sharp with their skills. 

Having the ability to trade along with other traders who share what works and using methods that have stood the test of time, may be the difference between traders who get lost in the chop and those who continue to grow.

Trading alongside mentors and peers – like the Simpler Trading online chat rooms – is a winning strategy and a critical component to growth as a trader.