The State Of The 200-Day Moving Average

• Three Major Averages are at their 200-Day MAs
• The NYSE Has Been Declining for a Year
• Will There Be Another Whipsaw?

Today, of course, is the State of the Union Address, but for the markets it might well be the “State of the 200-Day Moving Average,” as that’s the place where most of the major averages are currently residing.

Three Major Averages are at their 200-Day MAs

In Chart 1, for instance, all three indexes - the S&P, NASDAQ and NYSE Composites - have rallied back to this significant chart point. The 200-day timespan became popular during the mid-twentieth century, as crossovers offered relatively reliable signals for primary trend reversals. However, it’s certainly not perfect. One only has to reach back to the April/July period for the NYA, or the November/December period for the SPX to see that the 200-day MA, like all moving average timespans, is subject to bouts of false or misleading signals known as whipsaws. I am focused on the 200-day MA because several indexes are currently close to or actually at those levels. The 200-day MA represents a dynamic support or resistance zone. In this case, it is being challenged from below, so it is resistance. When many averages are approaching similar barriers, it becomes more significant than if the process is limited to just one. In the current situation, we can see that the MA for all three series is interacting with the three green trend lines. This raises the technical stakes even higher. Remember, the technical principle of commonality states that the greater the number of securities experiencing a specific technical event is, the more significant that event is likely to be.

In my monthly market roundup, I pointed out why I think most of the longer-term indicators monitoring the primary trend are still bearish. For example, Chart 1 shows that both the S&P and NASDAQ have been tracing out a series of declining peaks and troughs.

Chart 1

The NYSE Has Been Declining for a Year

Chart 2 reflects this in a more graphical format for the NYSE Composite. In spite of the strong post-December rally, a downward progression is still in force. The principal difference between the NYA and the other two averages is that the more broadly-based NYA failed to register a new high last September, meaning it has been in a bear market for just over a year. In one way, that’s good news, as the average duration of the really bad recession-associated bear markets of the 1970s, 1980s and 2000s was 17-months. We should never predict the termination of a bull or bear market using average figures, as those are rarely attained. After all, the 1929-32 bear lasted nearly 3 years. The reason I bring it up is to point out that the 2018-?? bear market is already quite advanced according to historical precedent. Equally important is the fact that, should the current economic situation turns out to be a mere slowdown of the growth rate, “the” low may already have been seen. That’s because bear markets associated with slowdowns or mild recessions are typically much shorter and shallower than those negotiating sharp economic contractions.

Chart 2

Chart 2 also demonstrates the two different types of characteristic for the RSI. During the bull market, the RSI traded in a slightly elevated band, as flagged by the two horizontal green trend lines. Oversold conditions were rare and offered great buying opportunities, whereas overbought readings were plentiful and did not generate much in the way of corrections. Since the 2018 high, these characteristics have reversed, in that overbought conditions have become rare while oversold readings, apart from last December, failed to generate much of a rally. The RSI is currently overbought, but not enough to reflect a bull market characteristic. Should it now start to push through and generate some blue shading, as it did in late 2018, that would be more indicative of a bull market trait. Failure from this point, on the other hand, would be more akin to bear market behavior.

Will There Be Another Whipsaw?

The stakes are quite high at this point, as the December downside break below the red support trend line looks to be a potential whipsaw. A move that could hold above the 200-day MA and green trend lines in Chart 1 would help to confirm that possibility. If so, it would be important for the Index to hold above that extended red line. That way, prices could digest their recent gains, using such a corrective period as a platform from which to extend the post-December rally.

On the other hand, if the Index slips below the extended red line, that could lead to trouble. Such action would be reminiscent of a trap laid for the bulls at the 1946 high. This is shown in Chart 3, where a false downside break was followed by a fake upside one. It’s important to understand that there were major differences between now and then in terms of time taken to complete the top, momentum characteristics and so forth. However, this example does go to show that false downside breaks are not always followed by strong rallies.

Chart 3

The same can be said for the 2007 top, where the breakdown and subsequent false break above the extended trend line are once again present, but in a different form of price behavior. I am not predicting such an outcome, because I honestly don’t know. I am merely pointing out that the long-term indicators remain bearish. That means that, while everything now appears to be ok, it is wiser to wait for these indicators to give us the all-clear before concluding that Mr. Bull is back in his pen.

Chart 4

Good luck and good charting
Martin J. Pring

The views expressed in this article are those of the author and do not necessarily reflect the position or opinion of Pring Turner Capital Group of Walnut Creek or its affiliates.