membership



The SPX and the 200-Day Moving Average
Market Indicator for the Week Ahead



The SPX Breaks -- And Retakes -- Its 200-Day Moving Average!



by Ian Harvey

Share

June 11, 2012

SPX-061112-MA

Introduction

A poor reaction to the May payrolls report on Friday, June 1, led to the biggest drop of the year by far for the S&P 500 Index (SPX), which lost about 2.5% for the day. As a result, the index closed below its 200-day moving average for the first time in 2012.

The 200-day moving average is a widely followed technical level, so there was a lot of talk about the significance of it being broken. Most pundits said a break below this trendline was a bearish signal – which, if you are a contrarian, would believe when technical levels or indicators become highly publicized, they begin to lose their predictive powers -- and can actually come to mean the opposite of what is commonly believed. Therefore the rally that occurred last week can be argued in both directions – and occurred:-

• despite the 200-day moving average being broken, or

• was actually initiated by that break.

A Quantified Look at the Significance of the 200-Day Moving Average


SPX-061112-MA-1



Breaking Below the Moving Average

Interestingly enough, before the 2.5% loss just over a week ago, the SPX's last close below its 200-day moving average was the last day of 2011. On the first day of 2012, the index broke above it and hadn't looked back. It's typically viewed as a ”bearish” signal when the market closes below this moving average, but the numbers explain it more thoroughly!




By looking at all dates since 1980 when the SPX closed below the 200-day trendline after having traded above it for at least the prior three months – presenting the table below which shows the results following the break. The second table shows typical market returns for comparison.

In those 22 instances it was, in fact, a bearish signal for the first month. However, that phase is rather short-lived -- look at the returns going out three months and later. The average returns following a break are higher than the "anytime" returns. These returns are not extraordinary, but they are certainly not bearish.

SPX-061112-MA-2



Retaking the 200-Day Moving Average Quickly

Since this 200-day moving average break happened on June 1st the SPX rallied about 3.7% last week and now sits more than 2.8% above its 200-day trendline.

Below, you'll see the index's returns when the 200-day moving average breaks for the first time in three months but is then retaken within a week. The nine occurrences show pretty impressive and consistent returns. After three months, the SPX was positive all nine times. Over the next six months and year, the market averaged gains of 10.78% and 17.04%, respectively. This could be a case where the trendline break (and/or weak jobs number) led to the climactic selling that marks the beginning of a strong, sustained rally.

SPX-061112-MA-3

Share


membership




Back to Stock Options Made Easy Home Page




Search Stock Options
Made Easy



Enjoy Relaxed or Fast-Paced Trading? Choose your Membership Style...

Whether you prefer to take a laid-back approach to your trading,

or to charge ahead in your options trading,

 Stock Options Made Easy Armchair Trader and Cut-to-the-Chase Trader Memberships put everything you need to succeed at your fingertips for just  $39 or $79 per month.





Search Stock Options
Made Easy




newsletter-free


Subscribe to our FREE
newsletter for all the latest options news!


Enter Your Email Address

Enter Your First Name











Follow S_O_M_E on Twitter











Subscribe to our FREE
newsletter for all the latest options news!


Enter Your Email Address

Enter Your First Name











Follow S_O_M_E on Twitter