May 5th, 2008

How Long Will Base-Building Take?

Everyone seems to have focused on the various major indexes being able to reach and cross over their 200-day moving averages (I wish I’d used a 200-day rather than a 180-day moving average in my Market Timing Indicator because I would then have been more in synch with all the conventional 200-day take and, in the process, getting more search hits; instead, I chose 180-day instead because I wanted multiples of 30 days: 60-, 90-, 180- and 300-day. Another example of “consistency being the hobgoblin of small minds?”) .

Another blogger referenced the following interest saying I’d never heard before:

“Bulls live above 200 day moving average whereas Bears live below 200 day moving average”. It means above 200 day moving average, bulls buy the dips and defend support levels; whereas below 200 day moving averages – bears eat up the rally and defend resistance levels. (TheIndiaStreet.com post “Bear Wall=200 Day Moving Average”)

My research generally supports this essence bull market theory and I’m not alone. Search the term “200 day moving average” on Technorati.com and you’ll find many references. Take for example the post “Moving Averages in the Bear Market” from the blog Theroxalandr:

“As you can see in the bull market the 200 DMA line is mostly above 50 DMA line because many stocks oscillate above and below their 50 DMA but they mostly stay above 200 DMA. In the bear market it is exactly opposite. I think you can use this chart as a definition of a bull or bear market, not a single definition, but one of the best out of many.”

What I want to highlight, though, is another cross over that is about to occur if the market continues to improve. This crossover lends support and confirmation to the notion that we’re putting in a base, building a bottom, that will evolve into a return of a chance for another bull run over the next 3-6 months. The crossover I’m referring to is the 60-day crossing up over the 90-day:

Most are focusing, rightly so, on Crossover 1 while Crossover 2 refers to the 60-day over the 90-day (both are MACD varieties). The 60-day average has already turned the corner and is just over 1.25% away from completing the crossover. My research indicates that’s inadequate for an “all-in” signal – at a minimum, the Index itself must move above the 90-day moving average.

As I mentioned earlier in “Precursor to a Healthy Bull Market“, the 4 moving averages’ ranking must first flip for a bull market to be securely in place. I also wrote a comment to that effect on another blog and was chided for only giving general statements:

“Before we can become complacent about moving to new high ground, it’s going to take quite some time for this reversal to be completed” let’s see Reversal to 12,800? Reversal to 12,500, to 12,100, to 11,800 – 600. Quite some time – in the 21st Century could mean, what? 4 to 10 days? 6 to 8 Months? So, what do you base that on – recovery of the Real Estate Market, good faith lending, banks really coming clean in the next month, Oil below $80 – what is your statistic?”.

You don’t have to be a genius to conclude from the chart above that it takes the Index itself to rise substantially above 1451, the currently value of the 300-day moving average, to turn all the moving averages around. Rising merely 4% and hovering at 1450 will merely stop the downward slop of the 300-day. It’ll take a sustained and extended move above 1451 , even to 1520 for 100-150 trading days to displace the damage caused to the moving average by the Oct-March decline.

Each of the averages will turn, in due course by the process will take time through continued slow improvements in the market and the Index itself. Unfortunately, it will take what most of us traders have so little of — patience.

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