This is the Real Vision workshop on charts. Now, we could have followed on from the module of the market drivers that underpin the performance of the broad market with this section on what drives the performance of individual asset classes. But we're already getting pretty chart heavy. So we wanted to first look at the key role that charts play before we look at the drivers of individual assets.
And charts are an essential part of an investor's toolbox. And yet there are many cynics out there who scoff at the use of charts to help spot trends as well as timing entry and exit points. But James, Jamie, and I think they're super useful. When the three of us were discussing the subject of charting we all agreed that charts are a great way to understand the history of a given market in a single snapshot.
A chart can very quickly help you to identify the important regimes and inflection points that were behind the price. You don't need to be an expert in any particular market to pull up a chart and get a feel for what's been going on. And this becomes all the more useful when scanning markets to generate ideas, using the chart as a starting point for fundamental research, where you can ask yourself, why is that breaking out?
So in this workshop, we'll focus on the value of charts in everyone's investment process. And to do that, we will go through the basics of identifying a trend, as well as key support and resistance levels. But this won't be a workshop of technical analysis, as we'll be doing that elsewhere. We will highlight a couple of well-thumbed chart patterns that we can use to set up entry and exit points as well as look at momentum indicators that help us spot momentum and exhaustion trends. And we'll also look at how charts can help identify relationships with macro data and with other asset classes to help inform us and to help us discover investment opportunities.
So we're going to have a look at a whole load of chart patterns shortly. But before we get into viewing the chart patterns, let's first have a very quick recap of what a chart actually is and what are the most common types that we can use. Now this is going to be pretty simple, but we will quickly move on.
Now it probably won't come as a shock to you that most of the time, we're looking at a price chart, which means that we have a time period on the x-axis and the price or per cent level on the y-axis. Let's look at three versions of the same chart. In this case, the S&P 500. And here, we are using daily charts, meaning that each data point usually shows the closing price for a given day.
There are many other time frames, from one minute charts, intraday to hourly, weekly, and monthly charts, and all are equally valid for different purposes. It all depends on the time frame you're investing in, which will be indicative of your lookback period. If you're getting in and out of positions over hours, then you are really not interested about the price action a year ago. Similarly, if you are building a long term position that you want to hold for years, most intraday movements would be irrelevant to you.
So anyway, the first one is a simple line chart. Line charts usually take one price point per day and that's usually the closing price. Many funds take their performance based on close to close prices. So this is a valid chart for those purposes. But before we leave this chart, I just want to highlight the price level on the 24th of February, 2022, which I'll come back to in a second. Hopefully that level is now imprinted in your mind.
If however, we are really going to get into trading and investing, especially over shorter time frames, we really need to use a chart that also displays the intraday activity. Because this may show some additionally interesting information about the range that an asset is moving through on any given day. It might also provide us with additional support and resistance levels.
Now this is the same S&P time period, but this time using the daily high, low, and close chart, giving us the full range of the S&P on an intraday basis. Now let's go back to the 24th of February, 2022. Here you can see that intraday, this was the lowest price year to date. But because of an intraday rally that day, the previous chart only showed the closing price, which was much higher.
The high, low, close chart has therefore given us that extra dimension. And before we leave this one, I again want you to focus on the 24th of February and then also on the 21st and 22nd of April. So now into that third chart. Candle charts can therefore provide the viewer with lots of information in a simple format. This is the stylized version of that candlestick. There are many formations that candlesticks can create, some of which are considered bullish, others neutral, and others bearish.
And just briefly here I want to go into one other aspect that's absolutely crucial with charts. And that's the time frame over which you want to view them. We're going to look at CPI in the US here. Now if we look at CPI over the last 18 months, it looks like a line from the bottom left to the top right.
But I have no frame of reference. I might that CPI around 9% is high. But if I don't, what information am I getting apart from a diagonal line? But if you then put that same data point, CPI, over 30 or 40 year chart, you can see now just how dramatic that move in late 2021 to 2022 has been. And that's the importance of time frame. If you're looking at something which is a monthly data point, you need to look at it over years and not just months, whereas a tick chart you can probably look over hours and probably more likely days.
So that's our very brief guide to some basic charts. Now let's have a look at some chart patterns. And we'll kick off with some basic support and then resistance levels, which can also double up as inflection points. One that we talked about a lot was the inflection point on gold that was building during 2012 to 2013.
What you can see here is after a number of retests, the 1520 to 1530 level, gold eventually broke beneath the support level and began a downtrend that saw gold bottom out nearly three years later, having lost over 30%. And what I was trying to do with this chart was identify what could be a key inflection point for gold, which would also then help with a macro story that was building around QE at that time. Now, to be honest on this one, I actually failed miserably the first time.
If you look at this chart, it tested three times first, and on that third occasion, I tried to get people short before that quite spectacular rally and rollover. And then it was that fourth test that was actually combining with some macro stories. And as you recall from an earlier discussion where volatility was low in the options market for gold, giving a great set up to try again. Basically having been burnt once, I wanted to use this inflection point in a little less dangerous manner, but still using that key support.
And you'll find there's some incredible conversations on Real Vision with legends such as Peter Brant and Dave Floyd, which go much deeper than we will here. But I still want to go through a couple of the more common setups that we mentioned in the pub. So let's have a look at a pennant.
This is that so-called pennant formation which identifies a period of consolidation ahead of a potential breakout and then a continuation in the direction of the trend. In this case, we're looking at a bullish pennant on US dollar yen, which had rallied from around 2012 to 2016 before entering a five year consolidation pattern until 2021. As price broke above the upper trendline, it signaled the end of the consolidation, which of course, became clearer with hindsight.
Now pennants are similar to flags and triangles that you might hear technical analysts talk about. They're all continuation patterns, which help to determine a breakout following a period of consolidation. They just have slightly different angles to the range of consolidation. And as we said, we're not trying to predict where price is going. We're just trying to get a good entry and stop loss level. The direction should take care of itself.
And reversal patterns are the other main type of chart formation, which, as the name suggests, are going to be most helpful in identifying a change in trend when you believe that the fundamentals have shifted. The head and shoulders formation is one of the ones we referred to a few times and is one of the favorites amongst technicians. Again, the clue is in the name and how this formation presents itself.
And as you can see, these tend to have some bizarre names. But don't think of them as astrological signs or voodoo. Names just make it easier to remember them. At the end of the day, it's just different patterns of investor behavior.
A head and shoulders is nothing more than a market that fails to reach a new high as momentum is losing steam, which might result in a reversal in that move. And that's pretty much it. Well, what we're trying to find is the peak. And you're looking for shoulders on either side and these are lower highs, which you can see here depicted on the chart.
Now often, people will try and identify these as they fall. What people need to remember is that just because something is forming that looks like a head and shoulders pattern, doesn't mean that it will actually go and become a classic head and shoulders pattern. What we're looking for is the potential to be there. And what gets most people excited is once the right hand shoulder has completely formed itself, you get a support line. And this is called the neckline.
And in the idealized version of that, it will be a horizontal line with a higher head in the middle and two lower shoulders on either side. What we then looking for is a break of that neckline. And this is often where people get really drawn in, but actually can be the part which is the most dangerous. What we'll often find is that a neckline breaks then some of the shorts will come in, push the price down, before we get a vicious rebound back to the neckline. And it's often after that retest of the neckline that we get the big move lower.
If we do get a head and shoulders that's forming in its classical way and we get that break lower, we should, if it's going to go to its end game, see a move lower that's equal to the approximate height between the head and the neck line. Now as I mentioned, often these don't work out in practice. But they can still be used to approximate a rough target. But if we do see the break of the neckline, the retest, and then that rollover, it should give us a little bit more conviction that things are going to play out in that classical pattern.
So that was a classic head and shoulders. And as we mentioned before, it can work in reverse, which funnily enough is called a reverse head and shoulders. And this is now a bottoming formation. And this is a chart, which is currently playing out at the beginning of 2022. And it's again on the dollar yen.
It looks like dollar yen is trying to break to the upside. Now this is a classic one with two shoulders and the head in the middle with a horizontal neckline. And it's been building over 20 years. And the reason why this is interesting is that this, if it is going to play out as a classic head and shoulders or reverse head and shoulders pattern, it will play out not only in the months, but in the years ahead. So it's one that we can all watch over the coming year to see if this formation plays in that classical pattern.
We just had a break of the neckline and now we're going to see if we get an acceleration higher or whether we get a retest. But that is a classical head and shoulders formation that's being created, but it doesn't actually tell us where the price will go. But it informs us of where the price might end up. And if we take that classical pattern, the distance from the bottom of the head to the neckline suggests that dollar yen could go well beyond 160, if this plays out over time.
And it's also worth mentioning that head and shoulders don't have to be exact to this pattern. There's been a wonky one in early 2022 on the US 10-year yield. A reverse head and shoulders pattern was forming and we got two slightly off-center shoulders with a clear head in the middle, though even that head was slightly wonky because of a price move in March 2020. The neckline wasn't a horizontal line, it was a slightly skewed line.
But what was interesting here is that it did conform to many of the classic elements. We saw yields break above the neckline, then it screamed higher, with bonds selling off and those yields moving up to a level very close to 3%, which is roughly the target that you would have expected once that neckline had been broken. So it looks like that wonky head and shoulders has indeed worked.
And the point here is that we don't need to look for the perfect head and shoulders because just as head and shoulders may not work all the time, they don't have to be perfect to actually go and play out in the manner expected over a certain time period. Now so far, we've used examples where it all seems to work out perfectly. But as we were talking about a little bit with the head and shoulders, the reality is that, on many occasions, these setups fail. And to quote Jamie from the discussion, "a chart looks great, until it doesn't."
So now let's have a look at some false breakouts. This isn't have a dig at technicians. Even Peter Brant acknowledges how the edge provided by these setups has diminished over the past couple of decades. And many traders would settle for a win-loss ratio of 50%, but still be able to make money, provided they size their bets and stop losses accordingly based on the expectations of these patterns. But what we need to be able to recognize is when a setup has failed, and then move on. Irrespective of the formation, a false breakout occurs when a price crosses the trigger line only then to fade back inside the range shortly after.
And we can see this in a great example from 2016 in the 30-year Treasury. There was a lot of uncertainty at the time around things like Brexit, the US presidential election, and even a few China mini devaluations over the previous 18 months. And the secular trend had seen yields descending lower for 30 years. And there were a lot of eyes focused on this chart, waiting to jump in as it made a new low.
When the break came, a lot of money piled in, buying bonds, expecting those yields to go lower. But the smart money could see that the fundamentals had changed. So savvy traders in the market began to take the other side of this bet and fade that move. And this resulted in what you see on the chart, the break lower, reversing back up through the support line in quick succession.
And another chart, which is very dear to my heart because I got sucked in by this one and was very fortunate not to advise all my clients to get super short, was the S&P 500 around about that same time at the beginning of 2016. It had formed, over the previous two years, what looked like a head and shoulders top with what looked like a very clear neckline. At the beginning of 2016, after the profits recession that we'd seen globally, and particularly in the US, after the commodity bust, the S&P started breaking down through the neckline.
And I, being the sort of bearish chap that I am, wanted to really get short there. But then the Fed, basically, relented on its rate hikes. It had just done one at the end of 2015, but did no more for another 12 months. And the Chinese came in with a lot more credit at the beginning of 2016. That lifted markets starting off with early cyclicals like the mining stocks.
And very soon, the S&P had broken back up above the neckline. And it never looked back for another two to three years. It was a terrible time to get short the S&P. So false breakouts like this can actually be a great reversal signal, and should at least alert you to a potential inflection point where the technical setup has been rejected and overwhelmed by fundamentals.