After last week there has been a lot of talk about the S&P 500 breaking back above its 200-day moving average (MA). On one hand, I’d agree that’s a good thing and could be promising. On the other hand, there seems to be a belief that the market is definitely headed much higher from here on out now that we’re back above the 200-day MA. Is that true though? Is the break back above the 200-day a sure-fire thing?
In one of my more recent newsletters I covered a very common, long-term buy/sell signal in the form of the 50-day MA crossing the 200-day MA. (Feel free to go to http://www.themeshreport.com/back-to-the-bull-or-still-a-bear/ for a review of this topic.) In short, the 50-day MA crossing above the 200-day tends to be a good sign of a trend change from down to up within the market. The opposite would apply when the 50-day crosses below the 200-day MA: a change of trend from up to down. One of the reasons I believe the markets will be heading lower overall is because of the 50-day MA recently crossing below the 200-day MA on the S&P 500.
Well, does this past week’s S&P move back above its 200-day MA change my view? Should it? Take a look at the following chart:
What you are seeing on the chart above is that last time the S&P had its 50-day MA cross below its 200-day MA. This was back at the end of 2007, and as we all know, that was the start of the bear market. You will also see that I have highlighted in blue (2) instances where the S&P rose back above its 200-day MA, one of which was after the crossover. So, it does appear that a rise back above the 200-day MA after a 50/200 crossover can happen, yet not change the overall direction of the main trend.
Now, I’m not trying to rain on anyone’s parade. Rather, I just want traders and investors to be cautious and on their A game no matter what. We don’t want to get lazy now that a few talking heads claim that the coast is clear. And hey, who knows, maybe some of those talking heads are right and we are going back up to new highs. Anything can happen, right? As a matter of fact, I recently noticed a subtle glimmer of hope for the overall trend. Please look at the next chart:
The above chart is obviously a current chart of the S&P 500 showing the recent 50/200 crossover that I mentioned earlier. You can also see the S&P’s recent rises above its 200-day MA. If you reviewed my previous newsletter on the 50/200 crossover, you know that sometimes a crossover can just be a fake-out and the 50-day MA can pull back above the 200-day MA, thus putting the up-trend back in force. Well, over the last week the S&P 50-day MA has started to rise back up towards the 200-day MA. Might the 3-month sell-off in the markets just have been a rough correction that is now ending? Stay tuned!
The Tale of the Tape: With the S&P 500 moving back above its 200-day MA, it can be easy to get a little giddy and somewhat complacent. History shows that there can be false alarms with all “signals”. The S&P could very well be heading to higher-highs, but be on guard for whichever way the market may turn.
No matter what your strategy or when you decide to enter, always remember to use protective stops and you’ll be around for the next trade.
Christian Tharp, CMT