KISS is the well-known acronym for “Keep it simple, stupid.” According to this principle, systems work best when unnecessary complexity is avoided.
Kelly Johnson, the engineer credited with coining KISS, didn’t imply that anyone adhering to the principle is stupid. The opposite is true. It requires a lot of intelligence to design a product (or program) that can be run or maintained without requiring a high level of sophistication.
Here is a simple (in the spirit of KISS) way to figure out whether now is the time to buy, hold, or sell the stock market — in other words, is the market about to reach a major top.
This chart of Dow Jones Industrial Average DJIA, +0.45% shows three active trend lines (red). The oldest trend line goes back 19 years and has several touch points.
For the first time ever, the three lines converge around 21,600 to build a resistance cluster. Is this the setup for a perfect storm?
Right about now — when we talk about trend lines — is usually when certain readers drop off and start posting some sort of comment with references to reading tea leaves or chicken entrails (so see you in the comment section).
And that’s fine; indicators only work when they have enough doubters. That’s because if it’s too obvious, it’s obviously wrong.
The truth is that no analyst comes up with the trend lines; the market does. We simply connect the points provided by the market (like drawing by numbers).
For those reading on, the dashed gray trend lines often (not always) are significant. More often than not, the market is aware of those natural resistance levels and reacts (either bullishly or bearishly).
Often the index is initially stopped by trendline resistance (red circles). However, when the index sustains a move above resistance, it has a tendency to keep going (green circles).
Since we are talking about multidecade trend lines, there are times when trade briefly pokes above trendline resistance. As the chart insert (which zooms in on daily bars) shows, this is the case right now.
The DJIA’s first attempt to break through resistance, on March 1, failed. At that time, stocks were at peak momentum, and the Profit Radar Report stated: “Stocks rarely ever top at peak momentum. Any pullback should be temporary in nature. The question is how temporary.”
Stocks now are no longer at peak momentum, so the reverse conclusion is that risk of some sort of peak is higher today than it was back in March.
The KISS conclusion is simple: The Dow industrials are trying to move above a long-term resistance cluster. Further gains are possible as long as the index remains above resistance (now support), but a break below support could unleash a wave of selling.
Does the KISS principle apply to other indexes? It sure does.
The tech-heavy Nasdaq-100 NDX, +0.34% has risen for 13 of the past 14 sessions and is extremely overbought. Read here how to apply the KISS approach to the Nasdaq-100.
Simon Maierhofer is the founder of iSPYETF.