What Lies Ahead for the S&P 500?

I've detailed some potential resistance points in the past few months on SPY (such as her on July 30th). Call it luck, but the market has bounced off the 50% retracement level and the top of the gap formed in October 2008.

A move through those levels would be a bullish sign, while a close below the 50-day simple moving average (see bottom chart) would indicate that the intermediate bull run is over. However, from a technical perspective, we are still in a bull run until the 200-day SMA (or 40-week) is breached. Volume picked up this week on the down days, which could potentially be a sign of things to come.

The first chart is weekly with Fibonacci, the second a daily chart with a resistance line at the top of the gap and a trend line (which we breached Friday, although I am writing this an hour before the market closes):

Comments

[Mad Hedge F...:]

mwe For the last six months there has been a great big whopping contradiction in the markets. The stock market has been discounting a return to the “Roaring Twenties,” while the bond market has been anticipating the return of the “Great Depression.” After yesterday’s publication of the Labor Dept.’s September nonfarm payroll number showing the loss of another 263,000 jobs, it looks like the bond market now has the upper hand. The really disturbing aspect of this number is that 57,000 teachers were fired, as states chop budgets to the bone. This is really eating our seed corn by the handfull. Stocks have dropped 5% from last week’s peak, as the bond market soared, the ten year yield reaching nosebleed territory of 3.05%. My call to buy the TBT, a leveraged bet that US Treasury bonds would fall, is starting to look a little green about the gills. The dollar still maintains its flight to safety status, which to me, is one of the great ironies of all time. It’s like that reprobate, alcoholic uncle with the bad teeth, who, when your car breaks down in the middle of a downpour in a bad neighborhood, will always let you crash on his sofa. Let’s call him your Uncle Sam. You have to hand it to PIMCO’s inveterate card counter, Bill Gross, who says this is all about transitioning to a “new” normal of 1%-2% real GDP growth. That’s why he was loading the boat with bond yields at 4%, a ballsey move at the time, which now smells like roses. I guess that’s why they call him the “Bond King.” As for me, I’m never wrong, just early. Sometimes way early.

Oct 03 12:46 PM

[Albertarocks:]

>A move through those levels would be a bullish sign, while a close below the 50-day simple moving average (see bottom chart) would indicate that the intermediate bull run is over. However, from a technical perspective, we are still in a bull run until the 200-day SMA (or 40-week) is breached. <

I think it's time someone poked a few holes in the idea of using moving averages as potential support or resistance levels.

A 50 day moving average is no more of a support or resistance level than a 2 day moving average. Since a moving average is only a mathematically interesting line that is a "derivative" of price history, it has absolutely no value as a predictor... other than the reality that some investors believe in it. In that respect, if price action drops down on top of a popular moving average such as the 50 day, and then bounces, it can indeed stir up investor confidence. In reality though, this is nothing more than a fluke.

For example, a lot of noise is being made that almost all indices have recently fallen slightly through their 50 day, the popular line of thinking being that the "next stop" is the 200 day. But the point could be made (and this is the truth) that while the S&P just passed through its 50 day, it also passed through its own 300 day, on the way toward the 200 day. Where's the sense in waiting to see if the 200 day will "hold", when the 300 day has already been breached?

There's no magic in moving averages as support or resistance levels, but I along with every other investor, do appreciate that they provide a smoother visual of what's happening. But do they actually offer support or resistance? Not in the slightest! Try using a 113 day moving average (pick any number you like) and you'll see that in reality it's just as meaningless as the 200 day.

The real value in MAs is that they can be used to formulate some truly meaningful data such as % of stocks above the 50 day. Now that means something.

You might ask, "why did you post this?", and the answer would be "because I'm bored this morning".

Oct 04 11:08 AM

[Scott's Inv...:]

A moving average is nothing more then an indicator - a 50 day can be used to indicate the intermediate trend (so could a 60 day, 49 day, etc.). A break below it can simply be used as a general 'indication' of where the market is trading. It does not guarantee price projections and there is no 'magic' MA number. I think the more relevant indicator in the article is the top of the Lehman gap, and the fib retracement which more or less aligned and proved to be a resistance point. Identifying support and resistance levels can help in making entries and exits, setting stops, etc. However, the only 'magic' number is price, because price pays.

Oct 04 11:40 AM

[Albertarocks:]

Agreed 100%


On Oct 04 11:40 AM Scott's Investments wrote:

> A moving average is nothing more then an indicator - a 50 day can
> be used to indicate the intermediate trend (so could a 60 day, 49
> day, etc.). A break below it can simply be used as a general 'indication'
> of where the market is trading. It does not guarantee price projections
> and there is no 'magic' MA number. I think the more relevant indicator
> in the article is the top of the Lehman gap, and the fib retracement
> which more or less aligned and proved to be a resistance point. Identifying
> support and resistance levels can help in making entries and exits,
> setting stops, etc. However, the only 'magic' number is price, because
> price pays.

Oct 04 09:37 PM

[H. T. Love:]

Great minds ...

Some time back, I posed the thought (actually, a question) that the only reason the 200 day (S)MA was significant was because folks believed it to be so.

My follow on was that I felt that was one of the reasons contrarians often did so well. When they saw the lemmings respond to these "artificial" signals and the contrarians were looking at more significant things that told the true story, all they had to do was position themselves for the certain-to-come reversal.

Now that I've learned a little more, I'm aware of "sell-siders" and "buy-siders" and it makes more sense. Everbody has to eat and feed their family.

HardToLove


On Oct 04 11:08 AM Albertarocks wrote:

> >A move through those levels would be a bullish sign, while a close
> below the 50-day simple moving average (see bottom chart) would indicate
> that the intermediate bull run is over. However, from a technical
> perspective, we are still in a bull run until the 200-day SMA (or
> 40-week) is breached. <
>
> I think it's time someone poked a few holes in the idea of using
> moving averages as potential support or resistance levels.
>
> A 50 day moving average is no more of a support or resistance level
> than a 2 day moving average. Since a moving average is only a mathematically
> interesting line that is a "derivative" of price history, it has
> absolutely no value as a predictor... other than the reality that
> some investors believe in it. In that respect, if price action drops
> down on top of a popular moving average such as the 50 day, and then
> bounces, it can indeed stir up investor confidence. In reality though,
> this is nothing more than a fluke.
>
> For example, a lot of noise is being made that almost all indices
> have recently fallen slightly through their 50 day, the popular line
> of thinking being that the "next stop" is the 200 day. But the point
> could be made (and this is the truth) that while the S&amp;P just
> passed through its 50 day, it also passed through its own 300 day,
> on the way toward the 200 day. Where's the sense in waiting to see
> if the 200 day will "hold", when the 300 day has already been breached?
>
>
> There's no magic in moving averages as support or resistance levels,
> but I along with every other investor, do appreciate that they provide
> a smoother visual of what's happening. But do they actually offer
> support or resistance? Not in the slightest! Try using a 113 day
> moving average (pick any number you like) and you'll see that in
> reality it's just as meaningless as the 200 day.
>
> The real value in MAs is that they can be used to formulate some
> truly meaningful data such as % of stocks above the 50 day. Now
> that means something.
>
> You might ask, "why did you post this?", and the answer would be
> "because I'm bored this morning".

Oct 04 10:29 PM