May 15th, 2008

What to Expect with a 180-day Moving Average Crossover

At the risk of sounding risque let me just say that we seem to kiss the 180-day moving average line every day and not being able to get to “second base”; the market just hasn’t been able to cross over that line.

But what if it does. What happens if we do cross above the 180-day moving average and enter the next plateau, the land between the 300- and 180-moving averages. What’s happened in the past when this has occurred? How long has the market stayed in this sort of purgatory, someplace between the MTI signaling it too risky to be in the market and it giving an all-clear signal to be “all in” (when the index finally crosses over the 300-day moving average).

The market has been in this same situation 25 times over the past 45 years:

Here are points you should take away from this data:

  • Reversing and dropping again back down bellow the 180-day moving average happened nearly a third of the time; the Index continued to move up and crossed over the 300-day moving average 8 times.
  • When the average reversed and crossed back down over the 180-day, it did so fairly soon after entering the zone, on average within 2.57 trading days. If there was sufficient strength to stay above the MA for more than 5-6 days, there’s a good chance of a move above the 300-day within an average 7.25 trading days.
  • Regardless of the direction the Index exited this zone, whether exiting up or down, the Index rose each time with an average gain of 2%. The maximum gain was 7.5% during 2003 as the market was emerging from the Tech Bubble Crash over 19 trading days; the second largest gain was 5.93% over 11 trading days at the end of the previous oil crises crash of 1973-75.

I can’t predict what will happen this time, no one can and anyone who claims they can is a charlatan. But these statistics give us one frame of reference for understanding what has happened in the past and what might happen this time.

In my back-testing of my Market Timing Indicator, however, a move above the 180-day moving average is a call to be “all in”. I’m jumping the gun by having reduced my cash position to around 50% by purchasing positions in many of the stocks I’ve mentioned here over the past several weeks (more on the performance of those recommendations tomorrow).

In the meantime, we’ll just take each day as it comes and follow the game plan outlined earlier (see May 8).

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