Wednesday, June 17, 2009

Moving forward in the SPX

Last week I took a look at historical performance of the S&P as it pertained to volume. Today I will look at the position of the S&P relative to the major moving averages (20-day, 50-day and 200-day MA). In a similar vein, Brett Steenbarger had a look at the past two days action and noted a bullish bias five days out.

For this analysis I based i on last weeks standings to keep a degree of continuity. On June 8th the S&P finished 3% above it 20-day MA, 7% above its 50-day MA and 2% above its 200-day MA. The closest match was October 12th 1970 when the S&P was 1% above its 20-day MA, 4% above its 50-day MA and 2% above its 200-day MA. What followed was a sideways period which lasted just over month before it rallied for another 6 months.

Other matches were September 4th 1992 (0%/0%/2%) which experienced a 5% trim over a month then rallied for the next 18 months.

August 31st 1984 (1%/6%/5%) which evolved into a 4-month sideways consolidation before the rally continued:

August 29th 2003 (2%/2%/10%) where the S&P broke through a summer consolidation in the early part of the most recent cyclical bull market.

August 5th 1988 (1%/1%/5%). Unlike prior examples this was a little more scrappy but was still part of a larger rally (i.e. no meltdown followed):

11th October 1978 (2%/1%/10%). The first example not to show a rally to new highs, but no major low either and the prelude for April through to October was not what we have seen:

March 30th 1981 (1%/3%/5%). A step beyond above where the lead in was not well matched given the sequence of lower highs. This was the only example to follow with a new 52-week low.

Jul 21st 1952 (0%/2%/5%). The last example has the look of what may be expected over the coming months - the fact it was in July is coincidental. If the S&P was to move towards a head-and-shoulder reversal we would need to see a substantial correction this summer similar to what played out in 1952. In the current case the S&P would go from 912 down to the 800s (a 13% drop). From there if it followed the 1952 case there would be an October bottom and a rally to new 52-week highs - although the markets foundered for most of 1953 with the summer of 1954 marking the beginning of the next bull rally.

No one knows what will happen in the future. The good news is from an historical standpoint a significant meltdown to match what has gone before is unlikely to occur. But it is also reasonable to assume we won't be seeing any great push higher anytime soon.

The worst of the selling may be behind us but the cyclical bear market is far from over yet.

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

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