S&P 500: Falling Off a Cliff or the Golden Cross?

It seems as though the much ballyhooed "Golden Cross" has arrived. The 50 day moving average has crossed the 200 day moving average one day after the S&P 500 lost 3%, the second Monday in a row which saw the markets sell off precipitously. Last Tuesday the selloff from Monday continued but yesterday the market seemed to be meandering plus or minus a little bit.

The question remains, whereto fore the market? On the intraday chart, the 50 day and the 200 day moving average crossed at just about 12:25. The market seems to have taken notice as the index has rallied about 3 points since then. But despite the cross and the bullish implications one cannot ignore the bearish implications of the selloff last week and Monday. Is this the much anticipated "healthy" pullback, or does the World Bank's revised economic outlook, an expected 2.9% contraction of the global economy this year vs. its March prediction for a contraction of 1.7 percent, presage new and significant declines to come?

If the index manages to follow up last weeks losses with a lower close this week the bears will begin to make more noise and the calls for the resumption of the bear market and the end to the "bear market rally" intensify. And the bulls might have cause for worry. Despite the Golden Cross, the S&P is now, on the three month chart, trading below both the 50 day and 200 day moving averages, and 900.00 seems a potential level of resistance.

Couple that with the concern that many profitable bulls have that the markets are destined for a sustained pullback and we could end up with a self-fulfilled prophecy. We've been waiting for the pullback. Now let's make it happen.

Disclosure: I own shares of SDY

Comments

[Clive Corcoran:]

It might be useful to qualify your comments about the relative positions of the moving averages on the S%P 500 (I am assuming you mean the cash index).
The 50 day simple moving average and the 200 day simple moving average have converged, as you suggest, at approximately the 900 level.
But for the exponential MA's - which arguably are more reliable as they place greater emphasis on more recent price action - are still some distance apart with a golden cross not even close.

According to my charts, and using the standard EMA parameters, as of Tuesday's close (June 23) the 200 day EMA is at 941 and the 50 day EMA is at 897.

Jun 24 06:15 AM

[Old Trader:]

Does it make any difference, from a technical perspective, how the cross is achieved? If the 200 is dropping faster to "meet" the 50, is that relevant? Just wondering..

Jun 24 09:24 AM

[johnbee:]

Charts are useless other than by consensus to follow them when they can be self fulfilling.
Every day events usually rule the markets short term and weight of money long term. This time its Governments who dictate as they control the money supply and in order not to have deflation they will risk some inflation. To understand this market you need to imagine yourself as Bernanke. Does he want Treauries to fail? Does he want the gold price to effectively devalue the $? Does he want oil to drop too much to create political problems for Arab states? does he want it too high to spoil a comeback or for house prices to remain low for too long? NO he doesn't. Does he want a lower stock market that has ruins savings and pensions. NO. So he will produce more money if needed. He will keep interest rates down. He will try to keep a balance between deflation and inflation.
He will not want commodities to take the place of the $ although this is less in his area of control but he can control many of the speculators by controlling bank lending and so get markets going his way. So where now? Consolidation for the Summer to wait and see how things work out as they seem to be. If needed more $ printing and more Treasury borrowing and so maybe one or two threats to keep a balance between money in Treasuries and stocks. So far so good. Touch wood for if he gets it wrong then we are all in pigshit.

Jun 24 11:44 AM

[Dave Dorgan:]

- Given that the markets are not reflecting reality e.g. oil (black bubble - no demand, even in OPEC's opinion), stocks (less bad is not good or indicative of a trend change), in my mind charts are relevant.
- Good rhetorical questions, but perhaps the real question is, do Ben and Tim have any power (money) left to facilitate their desired answers?
- Your last sentence sums it up.


On Jun 24 11:44 AM johnbee wrote:

> Charts are useless other than by consensus to follow them when they
> can be self fulfilling.
> Every day events usually rule the markets short term and weight of
> money long term. This time its Governments who dictate as they control
> the money supply and in order not to have deflation they will risk
> some inflation. To understand this market you need to imagine yourself
> as Bernanke. Does he want Treauries to fail? Does he want the gold
> price to effectively devalue the $? Does he want oil to drop too
> much to create political problems for Arab states? does he want it
> too high to spoil a comeback or for house prices to remain low for
> too long? NO he doesn't. Does he want a lower stock market that has
> ruins savings and pensions. NO. So he will produce more money if
> needed. He will keep interest rates down. He will try to keep a balance
> between deflation and inflation.
> He will not want commodities to take the place of the $ although
> this is less in his area of control but he can control many of the
> speculators by controlling bank lending and so get markets going
> his way. So where now? Consolidation for the Summer to wait and see
> how things work out as they seem to be. If needed more $ printing
> and more Treasury borrowing and so maybe one or two threats to keep
> a balance between money in Treasuries and stocks. So far so good.
> Touch wood for if he gets it wrong then we are all in pigshit.

Jun 24 12:31 PM

[TheFounder:]

Interesting view.
I'm in the pessimistic camp.

Jun 24 04:05 PM

[Mad Hedge F...:]

I vote cliff. Now that we are solidly into a correction, I have been flooded with requests from readers to call the next bottom in the S&P 500. Well here it is. Brace yourself. Put it on a Post-it-Note on your computer. It is without a doubt and unquestionably going to be 880, 850, 830, 800, 750, 666, or 320. That last number works out to be 90% of the book value of the S&P 500, which was the low seen in the 1930s depression. Yes, that depression, not this one. You are really asking me to solve a one billion variable equation, because that is the number of direct and indirect participants in global stock markets. If the few green shoots out there start to die off, the meltdown in commercial real estate accelerates, the Fed missteps by draining liquidity too soon, or there is another unforeseen shock to the system, then you can go with the lower of these numbers. If we are distracted by the health care debate, emerging market economies continue to perk up, and this strength helps our technology stocks stay alive, then sleepy narrow trading ranges will dominate, and the higher support levels will hold. But no matter what happens, I will be able to come back to you in three months and claim that I was right.

Jun 25 09:05 AM

[secmaven:]

The PPT is not going to let this market tank. The Fed is counting on higher equity values to revive the spirits of the US consumer and with that revive the economy.

Jun 26 02:07 AM

[one eye:]

Vote away, discard another Bullish Indicator because it doesn't fit into your Bear scenario.

"This time, its different."

Jun 28 05:49 PM