May 21st, 2008

Back Below the 180-day MA; So What!

Yesterday’s decline back below the 180-day moving average was not unexpected; actually, it was quite normal. [If I had been more conventional in designing my Market Timing Indicator I would have used the more conventional 200-day rather than 180-day moving average and then the Index probably wouldn’t have crossed up over that Moving Average].

In anticipation of that crossover on May 15, I pointed out:

  • 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.

Now that the Index crossed back below the 180-day what can we expect? The answer is nothing significant. The six times it’s happened over the past 44 years (those few times because of the alignment of the 3 other moving averages), three times the visit was short as it returned above the moving average within 2-3 days. I think it will do so again this time.

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