The Second Ugliest Chart of All Time
What it may be, however, is the better way to look at the S&P 500 over such a long period of time because, as a logarithmic chart, it measures change as a percentage as opposed to an absolute dollar value.
In so doing, it offers a more tempered look at the S&P’s trading action over the long-term and puts very large price movements into perspective. For instance, a 200 point increase on the index from 200 is, obviously, a gain of 100%. A 200 point increase from 400 is, however, halved and only a gain of 50%. A 200 point gain from 600 is reduced even further to a gain of 33% and so on and so forth. This declining percentage of change is captured by a logarithmic chart whereas on an absolute value chart a 200 point gain is a 200 point gain from any level and it will be measured and shown by the chart in equal increments.
In addition, considering that the S&P 500 is always being measured in relation to something, whether it be earnings, revenue, or growth, so too does a logarithmic chart allow us to see its change in price in relative terms.
And because the logarithmic chart shows us moderated changes in price over time, the technical target derived from using this chart is also a bit more moderate at 425.
While this case may be a bit more compelling and its predicted decline to 425 is certainly more palatable, more believable than a drop to 100, remember that the S&P 500 dropped nearly 90% in the early 1930s or about the percentage of change called for by using the measuring implication with the absolute value chart.
And thus I’ve been unable to relinquish its use and my initial reaction to that chart or the fact that the index appears ripe to fall to the very flat level found at about 100.
Disclosure: Diclosure: No positions