A movement above or below a 200-day moving average – a power of attorney for changes in an asset’s long-term trend – is always carefully maintained by traders, but the S&P 500’s long prison with that key level, when it bounces back from its bear market attempt, becomes something of a fix on Wall Street.
But even if the shares come back over the 200-day period, history indicates that extended driving upwards is far from guaranteed.
“It is not likely that it will be easy to get out and we expect a dog fighter here about 200 days.”
The focus on the 200-day can be reinforced by the fact that the average on Friday stood at 2,999.67, just one whisker under a large number.
“The fact that the S&P 500 comes from a 35% rally and that this 200-DMA is in line with a nice even 3000s seems to make this area especially important,” said Kevin Dempter, an analyst at Renaissance Macro Research, in a Friday note. “It is not likely that it will be easy to get out and we expect a dog fighter here about 200 days.”
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closed on a record high February 19 and then began a groundbreaking step as concerns about the coronavirus outbreak began to grow. Sales continued through March 23, with the big stock benchmark ending around 34% throughout. Since then, it hopes strongly to return and finished Friday at 12.7% below the highest. But the 200-day moving average has looked more like a cap after the index approached it about three weeks ago.
At the same time, it is kept above its 50-day moving average, a value used by traders to measure an asset’s short-term trend. In other words, shares are “caught between time frames,” Jason Goepfert, CEO of SentimenTrader and founder of independent investment research firm Sundial Capital Research, wrote in a Friday note (see chart below). By Friday’s end, the index had remained between 50- and 200-day averages in 21 straight sessions.
Since 1928, there have been 29 strokes that stretched to at least 20 days – and 21 of them ended with the S&P 500 falling below the 50-day average, while only eight ended with a print over the 200-day, he noted, giving about 72 % probability the index will break down.
But even if the index would defy the odds and break up to the upside, it might not give investors much comfort. Goepfert noted. When that happened earlier, the median return a year later was minus 9.2%, with shares giving a positive return only 38% of the time, he found.
In fact, hope over the 200-day moving average since 2009 “has always been met with some agita,” wrote Mark Arbeter, chairman of Arbeter Investments, in a Thursday class.
When S&P first managed the 200 days in June 2009 when we were to emerge from the big bear market and financial crises, the index stopped and then pulled back about 7%, peaking at the declining 200 days for about a month. The index took back 200 days in June 2010, after a rapid decline, paused and then fell to new corrective lows.
The 200 days were overhauled in August 2010 and rolled over again. After the big correction in 2011, “500” rose back over the 200-day for 2 days and then dropped 9.8%. We saw similar price measures in 2015 and 2016 when the late rally over the 200-day in October 2015 failed miserably.
“One would think that after a major correction or bear market, and then a rethink of this key average, the bulls would go wild, the bears would capitulate and the stock market would go into space. NOT! ”He wrote.
However, some map watchers are still encouraged by the market’s latest action and see room for solid gains, at least in the short term, if the S&P 500 manages the resistance on average.
The index is near a short-term double peak of 2,955 earlier this week, focusing on the 200-day average, says George Davis, chief technical analyst at RBC Capital Markets, in a note (see chart below).
Although a certain sales interest is probably around that level, the market is not overbought, which means that the “risk-on” power can force the index into further gains. A successful test of the average would put the 3,050 range in focus, he said, in a note, followed by 3,110, which would mark a 76.4% retracement of sales in February-March.