Friday, June 27, 2008

S&P Moving Average Behavior

Given all the recent turmoil I decided to take a look at the relationships between the 20-day, 50-day, and 200-day MAs with respect to each other and the current value of the S&P to see if there was in any predictive value as to what may follow over the coming months.

My first task was to calculate and rank the difference between the aforementioned moving averages and the S&P. Second was the application of a filter using the relative difference between the 20-day vs 50-day MAs, and 50-day vs 200-day MAs.

From there it was a matter of eyeballing for similar relationships from different time periods going back to 1951. The following table shows where similar such relationships (as per the MA relationships) existed in the S&P:

Unfortunately, if we look at the six most recent matches to today we don't get a clear pattern as to what may follow. In the charts that follow 'closest' matches are marked with a blue arrow.

January of this year, 1982, and 2002 (to 2003) were fairly similar in markets traded in a sideways pattern for the following 6 months. In 2002 the sideways pattern continued in to 2003 when another match was made; this last match was immediately followed by a strong rally. Adding to the mix was the match of 1982 which was soon followed by the incredible bull market to 2000.

As with 2003, the picture was bullish for 1998 when soon after the match a rally followed:

But before the bunting and balloons are rolled out the painful crash of 2001 lingers in the background; it had the greatest number of matches to the current picture but took the quickest and one of the hardest falls of all matches:

The take home lesson is for the next month or two further downside is not just likely but probable; only in 2003 did a rally develop soon after the match. For the other five of the six matches the S&P lost between 7% and 30% of its value before it finally turned around.

From a buyers perspective there is little incentive to be long S&P futures or stocks until a firm break of the 200-day MA occurs.

The good news for bulls is once the S&P gets past the 200-day MA there is likely to be a very tradable rally.


Thanks to AfraidtoTrade for linking this article

Dr. Declan Fallon, Senior Market Technician, the free stock alerts, market alerts, and stock charts website