S&P Below 200-Day MA: Does the Moving Average Matter?

Commentary May 26, 2010 at 08:00 PM

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On May 20, the S&P 500 fell below its 200-day moving average for the first time in 216 trading days.

For many, this was a complete surprise.

A look at some of the headlines from April 26, the day the markets peaked, shows how big:

- Bloomberg: "U.S. stocks cheapest since 1990 on analyst estimates;" "Biggest banks are back as JPMorgan, Citigroup turn corner on credit crisis."

- "Wall Street Journal": "Consumer mojo lifts profits."

- Yahoo Tech Ticker: "S&P could hit 3,000 by 2020."

But the ETF Profit Strategy Newsletter observed the following on April 28: "With various sentiment gauges having reached multi-year extremes and Investors Intelligence bullishness at 54% (the highest since December 2007), the potential exists that Monday's high – which was only one point short of the 61.8% Fibonacci retracement at 1,220 – marked a significant market top."

Admittedly, the 200-day moving average is a fairly static, even lagging indicator.

However, many financial institutions swear by moving averages, especially the 50- and 200-day MA.

A break of the MA often results in more selling and even lower prices.

In fact, such a breach can shift the market's dynamic and change investor's perception from "buy on the dips" to "sell into rallies."

We know that perceptions drive the market. And courtesy of the European financial turmoil, investors are more skittish today than any other time of the past year.

It is certainly prudent to keep a close look and stock's performance and avoid being caught up by another unexpected waterfall decline. The ETF Profit Strategy Newsletter provides bi-weekly forecasts to help investors be one step ahead of the market.

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