2018 Recession: S&P Hits Critical Threshold

Posted On April 3, 2018 12:51 pm

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!)

 Related: Is a Recession Coming? Here’s What You Should Know. 


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Steve Smith

Steve Smith have been involved in all facets of the investment industry in a variety of roles ranging from speculator, educator, manager and advisor. This has taken him from the trading floors of Chicago to hedge funds on Wall Street to the world online. From 1987 to 1996, he served as a market maker at the Chicago Board of Options Exchange (CBOE) and Chicago Board of Trade (CBOT). From 1997 to 2007, he was a Senior Columnist and Managing Editor for TheStreet.com, handling their Option Alert and Short Report newsletters. The Option Alert was awarded the MIN “best business newsletter” in 2006. From 2009 to 2013, Smith was a Senior Columnist and Managing Editor for Minyanville’s OptionSmith newsletter, as well as a Risk Manager Consultant for New Vernon Capital LLC. Smith acted as an advisor to build models and option strategies to reduce portfolio exposure and enhance returns for the four main funds. Since 2015, he has worked for Adam Mesh Trading Group. There, he has managed Options360 and Earning 360, been co-leader of Option Academy, and contributed to The Option Specialist website.

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