Wednesday, August 10, 2011

What Next For The S&P?

In my last post in February 2011, I had talked of an upside target of 1,392 based on an assumption 1,275 support held. Other than a brief spell below 1,275 in March, the S&P managed to rally to 1,370 before it fell back into the 1,260-1,345 trading range. This was the way until August when it said goodbye to its 200-day MA and to 1,260 support.

The rapid drop put the index into a unique situation which offered few parallels. At Monday's close, the S&P was 13% below its 200-day MA and 20-day MA, and 14% below its 50-day MA. At no time since 1952 has this scenario repeated.

The closest match we get is December 1973. Here the S&P was 13% below its 200-day MA, 11% below its 50-day MA and 5% below its 20-day MA.

Despite making a brief recovery above its 20-day and 50-day MAs in the first quarter of 1974, the outcome was ultimately bearish as sellers again struck in the second half of 1974 to knock a further quarter off the market.

The good news for bulls is we have only a single data point to work with, so there is nothing concrete to suggest the same will happen again. However, it's a warning not to fight the trend, particulary when there is a decisive break of the 200-day MA as is the case now. Use Zignals Stock Alerts to keep you informed as to when your favorite markets and stocks cross above their respective 200-day MAs.

If you haven't taken a holiday from trading, now may be the time to do so.


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