A move above or below a 200-day moving average – an indicator of changes in the long-term trend of an asset – is always closely watched by traders, but the S&P 500’s long advertising at this key level as it moves away from its bear recovered. The market slump becomes a kind of fixation on Wall Street.
But even if stocks break above the 200-day mark again, history shows that a longer upward trend is far from guaranteed.
“An outbreak is unlikely to be easy and we expect a dogfight here for around 200 days.”
The focus on the 200-day could be reinforced by the fact that the Friday average was 2,999.67, just one whisker below a large round number.
“The fact that the S&P 500 has rallied 35% and that this 200-DMA matches a nice even number of 3,000 appears to make this area particularly important,” said Kevin Dempter, analyst at Renaissance Macro Research , in a Friday note. “An outbreak is unlikely to be easy and we expect a dogfight here for around 200 days.”
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The S & P 500
closed at a record high on February 19 and then started a breakneck leap as concerns over the outbreak of the corona virus began to grow. The sell-off continued until March 23, with the large-cap benchmark around 34% below its all-time high. Since then, it has recovered strongly and ended Friday at 12.7% below its high. However, the 200-day moving average looked more like an upper limit after the index first approached it about three weeks ago.
At the same time, it is above its 50-day moving average, a metric used by traders to measure an asset’s short-term trend. In other words, stocks are “caught between time frames,” wrote Jason Goepfert, head of SentimenTrader and founder of independent investment research firm Sundial Capital Research, in a Friday note (see chart below). By Friday close of trading, the index for 21 consecutive sessions was between the 50- and 200-day averages.
There have been 29 stripes spanning at least 20 days since 1928 – and 21 of these ended up causing the S&P 500 to fall below the 50-day average, while only eight ended with a surge above the 200-day average . With a probability of approximately 72%, the index will collapse.
But even if the index defies the opportunities and breaks up, it might not offer investors much comfort. Goepfert noticed. When this happened in the past, the average return was minus 9.2% a year later, with stocks returning positive in only 38% of cases.
In fact, jumps above the 200-day moving average since 2009 “have always been a bit of a fuss,” wrote Mark Arbeter, president of Arbeter Investments, in a Thursday note.
When the S&P passed the 200-day test in June 2009 for the first time when we emerged from this large bear market and the financial crises, the index came to a standstill and then retreated by around 7%, being around the top the declining 200-day period reached a month. The index resumed the 200-day mark in June 2010 after a rapid decline, paused and then fell to new correction lows.
The 200-day run was overhauled in August 2010 and extended again. After the major correction in 2011, the “500” rose above the 200-day mark for 2 days and then fell by 9.8%. We saw similar price movements in 2015 and 2016 as the late rally over the 200-day period in October 2015 failed miserably.
“One would think that after a major correction or bear market and repeating this key average, the bulls would go wild, the bears would surrender and the stock market would go into space. NOT! “He wrote.
However, some chart watchers remain encouraged by recent market action and see room for solid gains at least in the short term if the S&P 500 overcomes resistance on average.
The index’s closing price above a short-term double top at 2,955 earlier this week focused on the 200-day average, said George Davis, chief technical analyst at RBC Capital Markets, in a note (see chart below).
While some sales interest is likely to be near this level, the market is not overbought, which means that risk-on-dynamics could lead the index to further gains. A successful average test would focus on the 3,050 area, he said in a note, followed by 3,110, which would mean 76.4% tracing of the sell-off from February to March.