Courtesy of Joshua Brown, The Reformed Broker
Obviously I’m showing you this in hindsight, past tense always making geniuses out of everyone. But the fact that the market is bouncing from the lows of yesterday morning should come as no surprise to anyone who puts even a modicum of faith in the idea that “price has memory.” Of course it does.
(CLICK TO EMBIGGEN!)
The 1800-ish level on the S&P 500 has served as major support twice since last summer. No one should be shocked that this is an area where buyers come in (or shorts cover) once again. Doesn’t mean it will hold, doesn’t mean it can’t be violated within hours or days. Just an obvious level for a temporary reprieve.
I want to point your attention to something else on my childishly simple chart above, however, because it’s worth mentioning. Because there was a death cross followed swiftly by a golden cross followed by another death cross within such a short, compressed amount of time, there is common refrain these days that “moving average crossover strategies no longer work.”
I kind of agree but kind of don’t.
The thing is that citing a moving average crossover and making no mention of the overall slope is always stupid. Only on television do people talk about crossovers without the context of the prevailing trend. The “head fake” I show here – in which a supposedly bullish golden cross was quickly followed by a washout – occurred within the context of a downward-sloping 200-day moving average. Actual technicians who trade had full permission to ignore it. Most did, and that paid off.
The takeaway: Understanding the prevailing trend is more important than moving average crossovers. The prevailing trend went flat last year and the 200-day (or ten-month) is now sloping downward. Keep this in mind the next time you hear a news anchor proclaim “We’re back above the 200-day moving average on the S&P 500!” This describes nothing and there are zero implications.
