By: Steve Smith
Yesterday the S&P 500 Index (SPX) broke the 200-day moving average for first time since Brexit breaking a record 643-day streak of holding above the trend line. As we’re about to see, this could be another reason to expect a 2018 recession.
This is also only the fourth occurrence since the financial crisis in 2007. It’s interesting to note that the two prior occasions dipped below for just a single day and were precipitated by a known singular event; the above noted Brexit and the 2016 U.S. election -which actually only breached the 200 dma during the overnight session.
Interestingly in both cases it was the supposedly “bad scenario” that did occur once again the event past stocks rallied, once again showing how the market is prices in known events or acts as a discounting mechanism.
By contrasts recent drop below the 200 DMA comes from a concerns surrounding a variety of unknowns, from the direction of interest rates, to trade tariffs to true impact of tax policy.
Those fundamental issues will play out over time but Helene Meisler from the Street provides a great technical analysis as to whether the DMA is a Line in the Sand.
Here’s her take.
Recently I have written about the now-rolling-over 50-day moving average. I have explained that when we look back 50 trading days ago and see that the S&P 500 is dropping that January run we know that the moving average line is rolling over — and a rolling-over moving average line acts as strong resistance.
The 200-day moving average line is no different, it’s just slower moving and therefore has more longer-term implications. With that in mind let’s take a look at a longer-term (20-year) chart of the S&P 500 with its 200-day moving average line.
The first thing I want you to notice is that when it is heading down (rolling over) it is resistance on almost every single rally. When it is rising it is support on almost every single decline. Even if broken, the breaks tend to be temporary.
Now let’s take a look at some of those breaks up close.
In late August 1998 the S&P broke the 200-day moving average line. (Point A on the long-term chart). Looking back 200 days prior to the break, we discover it was November 1997 (red arrow on the chart below). It was a close call in that the S&P traded down to that zone but it didn’t trade under it, so the moving average went sideways but never rolled over. Notice that the first trip back to it was resistance, though (also please notice the “W” pattern, just because!)