The Indicator That I Just Can’t Stop Thinking About (or Seeing) By, D.R. Barton, Jr.

Barton TT1When Van Tharp first explained to me perhaps the most important financial concept that I’ve ever heard, my mind rejected it immediately. My engineering-trained, logical/linear brain could not accept this simple precept: We don’t trade the markets. We trade our beliefs about the markets.

What kind of touchy-feely stuff was that? The markets are about cold, objective analysis, right? Everybody knows that. But over the next 25 years I’d come to realize over and over again how true this core concept is in both big and small ways.

Similarly, the concept that a simple indicator – a simple average of closing prices – could still play an important role for both big money institutional traders and brand new, long-term 401k investors, just doesn’t make sense. Until…we remember that they are both just trading their beliefs about the market. And while new investors and seasoned traders may have different levels of sophistication in arriving at those beliefs, they both get to that line on a chart, infer some meaning of that line and eventually act on their beliefs about that line.

It’s a powerful thing – the belief about what others are doing or might do because of that line. And my friend Van helped me understand why that happens over and over again.

It’s such an important and recurring concept – the influence of a conceptual line that can’t be crossed. And since the four major U.S. stock indexes are all on one side or the other of similar decision-point lines (as we’ll see visually below), I thought it very timely to quickly review the origin story, as best I can find it, of “drawing a line in the sand”. And then, see why this notion is, ONCE AGAIN, weighing heavily on traders’ and investors’ minds at what could be a big turning point in market trends.

We’ve been “drawing a line in the sand” for thousands of years. Here’s one possible reason why we still use that phrase (and one of my favorite narratives that I’ve researched over the past 24+ years writing articles for VTI):

It all started with a potentially explosive standoff that played out in the sands of northern Egypt some 2,200 years ago. Chronologically, our story occurs right in the middle of the 323-year period between the death of Alexander the Great and the birth of Jesus of Nazareth.

As we look in, an invading military force in Egypt (which was at that time a Roman protectorate) is being presented with a “leave now or suffer the consequences” ultimatum signed by none other than the Roman Senate.

Antiochus IV Epiphanes, the sovereign of the Seleucid Empire (modern-day Iran, Iraq, Syria and parts of central Asia), made a preemptive attack on Ptolemaic Egypt, which had previously demanded a return of captured lands.

Let’s get the players straight. After the death of Alexander the Great some 150 years earlier, the power void was filled by four of his generals who would, after intrigue and wars aplenty, turn Alexander’s conquered lands into four kingdoms. Two of those would become the Seleucid Empire, ruled by this article’s focal point, Antiochus IV and Egypt, ruled by the Ptolemaic dynasty.

In 170 BC, Antiochus captured all the major Egyptian cities save the capital city of Alexandria. He left behind a puppet government trying not to invoke the ire of Egypt’s protector—Rome.

But in 168, Antiochus could not leave well enough alone and returned to finish the job of conquering Egypt. Meeting little resistance, he and his army crossed the river Eleusis. This was the last natural barrier separating them from their goal of Alexandria—a mere four miles out. It was there that they were met by Rome’s envoy, Gaius Popilius Laenas. He did not have an army with him – just a demand signed by the Roman Senate that Antiochus withdraw or be considered at war with the Roman Empire.

Antiochus held out his hand as a friendly greeting to the elder statesman from Rome. Instead of receiving a handshake in return, the Roman historian Livy records what happened next:

Popilius, however (instead), placed in his hand the tablets on which was written the decree of the senate and told him first of all to read it. After reading it through, he (Antiochus) said he would call his friends into council and consider what he ought to do.

Popilius, stern and imperious as ever, drew a circle round the king with the stick he was carrying and said, “Before you step out of that circle give me a reply to lay before the senate.” For a few moments (Antiochus) hesitated, astounded at such a peremptory order, and at last replied, “I will do what the senate thinks right.” Not till then did Popilius extend his own hand to the king as a friend and ally.

So, we have the first-ever recorded event of someone “drawing a line in the sand”. It’s a phrase that means a boundary or limit to what one will accept. Popilius’ line, if crossed, meant a declaration of war.

The U.S. stock market has done the same for us, though the war is between the bulls and the bears. The market has shown us that there is currently a “line in the sand” over which it will not cross. Let’s take a look (and revisit Antiochus and his audaciousness one more time) …

This Market Has Shown Respect for This Line Over and Over

The market has shown us that its “line in the sand” is now important because of how far away it is, rather than just as a boundary line.

This market’s “line in the sand” is our old friend, the 200-day moving average (MA). Here’s why I’m seeing the 200-day MA and a closer-to-the-action support level in my sleep…

1171 DR Chart1 2

Much like Popilius’ demarcation drawn using his walking stick, our line in the sand is just a mental construct—a relatively arbitrary calculation drawn on the chart. What, then, makes it so useful? I can answer that question with one word.

Eyeballs.

Loads and tons of eyeballs are watching this line. As I’ve told you in past articles, when lots of people are looking at an indicator, it becomes an important reaction area. And for many years and in many assets, the 200-day MA and other key support and resistance levels are really important eyeballs.

But before we look at other index charts, let me give some quick comfort to those of you who might be thinking, “But D.R., price does occasionally pop above or below a key level. How can you say that it’s a true ‘line in the sand’?”.

One of the key lessons I had to learn in applying technical analysis is that indicators are not discrete points on the chart. They are zones or levels where we need to pay attention.

Remember that prices on the chart are determined at a second-by-second auction. Market prices are not just the combined knowledge of all market participants at any given moment. As we all know, psychology is far from an exact science. So, our tools need to match the flexibility needed to understand that underlying psychology.

Let’s look at the other major indexes. First, the Nasdaq:

1171 DR Chart2 1

And the Dow Jones Industrial Average, which is right at a key “line in the sand”:

1171 DR Chart3

So, what is pretty straightforward for now: Short and intermediate-term traders can play rebounds off of these key “eyeball-driven” support and resistance levels or use them for stop-and-reverse trades. Longer-term investors can follow institutional decision-makers and think twice before sticking with an investment or committing significant money to an investment that’s on the wrong side of the long-term trend.

Be sure to catch the newsletter next week when I talk about some of the key lessons that some luminaries in the financial world have taken from Van’s work and, more importantly, how you can apply those same lessons. I’ll give you some insight into a new investing and trading project I’m working on as well. (Ooo—some suspenseful mystery!)

I always love to hear your thoughts, comments and especially your additional insights! Also if you just can’t wait the hear what I’m working on, please send an email to drbarton “at” vantharp.com

Great trading and God bless you,

D. R. Barton

P.S. This part of the story has always been amazing to me:

My Jewish friends (and lovers of history in general) will recognize Antiochus IV Epiphanes for a very different reason than our “line in the sand” example. Because, not long after leaving Egypt, Antiochus found time to outlaw Jewish religious practice in Israel in a significant departure from his Seleucid and Ptolemaic predecessors. He went so far as defiling the Temple in Jerusalem. So not only was the first recorded “line in the sand” drawn around a belittled Antiochus in 168 BC, but he also kicked off the Maccabean Revolt in Israel later that year.

That revolt would end four years later. And it was during the re-dedication of the Temple in Jerusalem that the original Hanukkah miracle occurred.

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