What can be gleaned from a price chart of an underlying asset?
The long term; the fundamentals
First of all, we need to determine the scale at which we are looking. My recommendation is to focus primarily on the longer term when weighing investment opportunities. The first important factor here is the fundamental circumstances. Is the underlying value historically expensive, or historically cheap? We will not be taking a fundamental view in this analysis of the S&P 500. In short, analysts agree that the most important US index is historically expensive, and that should make every investor wary. Fundamental investors, such as Warren Buffett with his Berkshire Hathaway, are therefore sitting on a relatively large pile of cash at the moment, because it is not easy to find something with a lot of potential, while few investors see that potential.
But as mentioned, fundamental analysis is another chapter; today we are looking at the trend on the S&P 500 and whether there is anything to be said about the phase the market is in.
WHAT IS QUANTITATIVE ANALYSIS?
Quantitative analysis is primarily based on data and the patterns that can be identified from that data. Statistics therefore play an important role. Within quantitative analysis, algorithms can be created that generate price targets. We are not including those price targets in today's chart. Today, we are looking at three aspects: we are looking at the wave movements to see if we can determine what phase the market is in (1), we are looking at the RSI (Relative Strength Index) (2), and we have included some Sequential counts by Thomas DeMark in the chart (3).
THE SEQUENTIAL COUNTING OF DEMARK
DeMark is an econometrician by training, and he has developed a methodology to try to determine the phase in which the underlying value finds itself. He assumes that in the initial phase of a trend, investors are more or less in agreement. There is little doubt and the underlying value is bought relatively steadily in the case of an uptrend and sold in the case of a downtrend. He calls this phase the 'setup', which is indicated in brown in this chart. This is followed by the Countdown. In the Countdown phase of the market, investors are less in agreement with each other. Some take profits, while others continue to buy. This leads to a different market structure, and DeMark has developed a count for this that does not go beyond '13'. In this chart, the Countdown count is indicated in red numbers.
THE WAVE COUNT
In this chart, we also count the waves, and we do not do this using Elliott Wave, but in a completely objective manner, which means that every countertrend that we include in the count must be objectively stronger than the previous one.
THE RSI
The Relative Strength Indicator becomes interesting when we see divergence. For example, prices rise to new highs, but the RSI no longer follows suit and reaches a lower peak. The opposite occurs during a decline: prices reach lower lows, while the RSI reaches a higher low. There is much more to say about working with the RSI, but today we will limit ourselves to this divergence in order to draw conclusions.
We are looking at approximately 9 years of price formation here.
What immediately stands out is that there is an upward trend on balance.
First, let's look at the first time this upward trend was challenged; this happened to some extent in 2018, but even more so in 2020, which we as asset managers and analysts refer to as "the Corona crash." In a very short period of time, the S&P 500 fell sharply in March 2020 as a result of the global panic about the potential consequences of the pandemic.
THE WAVE COUNT: WE ARE IN PHASE V, THE FINAL PHASE OF THE UPWARD TREND
Here you can see that we have referred to this as a III–IV movement within the objective wave count. Within the wave counting method, a wave movement never goes beyond a so-called wave V (or v, if the wave movement is of a lower order).
This means that, starting from the bottom of 2020, we see the market as being in its final upward phase. This final upward phase will only be 'complete' when there is a correction greater than that of 2020, which would have to be a very sharp decline.
As long as we don't see that, it is still the case that, objectively speaking, we are in an upward trend.
Okay, let's now look at the development within this phase V from the bottom of 2020. We see an initial cyclical phase of the V that continues through 2021. We have called this 'i', the first upward phase of a larger wave V. In 2022, Russia's attack on Ukraine begins, and 2022 becomes a weaker investment year mainly for that reason, as there are many economic implications of Russian aggression.
Then, starting in October 2022, wave 'iii' of V begins. This movement continues to the present day, in 2025, and can now also be divided into an upward subcycle (i) and (ii). So, in wave counting terms, we are in a (iii) of iii of V.
What is the expectation associated with this? The most important thing is that we should expect higher peaks in the long term. That is the first point. Secondly, sooner or later we will see a significant downward movement, which will cause a downward (iv). In practice, this means that several months of growth will be wiped out. However, according to current speculation, this expected decline will prove to be a buying opportunity.
THE RSI
Now that we have assessed the wave structure, let's see what the RSI tells us.
We see three overbought situations in the RSI, indicated by a large green circle at the bottom of the chart, where the RSI is located. An overbought situation in the monthly chart is good if it is the first time this overbought situation has occurred within the trend. We can see how things progressed with two green circles. The overbought situation in 2017 led to a higher peak in 2018 after a decline of a few months, but now with a lower RSI. This was followed by a somewhat larger decline, but from 2018 onwards, a new upward phase began until the beginning of 2020. Here we see that the RSI placed a lower peak twice, while the index placed a higher peak in both 2018 and 2020.
Then, prior to the peak of 2021, we see that the RSI is becoming overbought again, which is another good sign. Indeed, the 'real' peak turned out to be a little later, and now with a lower RSI. So there was divergence, and the decline of 2022 followed. That was a somewhat longer decline, and it was not until November 2024 that we saw a new overbought situation, which, after a negative month of December, still shows a lower RSI at the moment, while January 2025 has set a new peak.
The RSI therefore currently indicates that caution is advised, as there is a chance of a temporary peak for the S&P 500 in 2025, either now in January or somewhat later, which could be followed by a larger decline. According to this analysis, this decline should still present a buying opportunity.
THE SEQUENTIAL COUNTING OF THOMAS DEMARK
The background to "counting out" a rise or fall is this statement by DeMark: "a trend is a trend until it is about to end."
In other words, we use this method to try to see if we can spot a peak or a bottom coming.
In this monthly chart, we see a setup phase occurring three times. When attempting to "count out" in 2021, we did not get further than the red "10," after which the war in Ukraine broke out, and this countout was interrupted.
From a new setup, which was formed from the 2022 bottom, we arrived at the '13' in November 2024, with a lower December month, but in the meantime, a new setup has already emerged, which is positive, because from the new setup we are already working on the next and now faster Countdown phase, in blue, and no longer in red. We apply a faster 'countdown' as the trend progresses.
What does this Sequential Telling tell us? In line with the RSI reading, the telling tells us that we need to be very cautious in 2025, as a '13' has been placed in the monthly chart.
CONCLUSION OF THE ANALYSIS
It is clear that we must expect a larger correction, and only once this correction has taken place in the larger picture of the monthly chart will there be more room for the S&P 500 to rise again.