March 11th, 2011

Market Breaks Under 50-day Moving Average

The market fell under its 50-dma yesterday, the first time since November. Many commentators with very short time horizons view that as a sell signal. On the other hand, I believe that a break below the 50-dma, in and by itself, indicates nothing when it comes to trend trading the market. So far, it should only lead you to conclude that this may indicate the need to rotate some stocks and industry groups and provide a buying opportunity to do that. I need much more confirming evidence before I’m going to change my longer term market view and call for wholesale sale of stocks.

The following comes from last weekend’s Recap Report:

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I display the Market Security Meter at the top of each week’s report without much thought … until this past week, that is, when I wondered when it might change (I leave the “why” of it’s changing to the fundamental analysts who always come up with a host of explanations after the fact). The S&P Index has been in perfect bull alignment (Index above 50-dma, both above the 100-dma, above the 200-dma, above the 300-dma) since Nov. 24, or for the past 70 trading days as the S&P has risen 10.25%. But how does this run rank historically?

This perfect bull alignment has occurred 195 times since 1963 (excluding the current one) encompassing 4115 trading days, or 35% of the total. The important point is that only 11 runs, or 5.6%, have lasted as long and the percentage move of the S&P was greater only 9 times:

So as market history goes, this run has been pretty remarkable and leads us to conclude that there’s a strong likelihood of change coming:

Almost all of these runs end with the Index falling under the 50-dma, the most likely outcome this time around also.

But a fall under the 50-dma in and of itself is not a bearish omen. As noted on the above chart, the Index had a similar bearish alignment from October through November when it crossed under the 50-dma for two days. Rather than a time to sell, that violation of the 50-dma launched the current bull run. Stability in the volume trend as measured by the OBV, however, would support a view this correction would be brief and mild, similar to the one in November.

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  • Anonymous

    semi got hit hardest, jsut don't know where the money going? what is your take?

    http://finance.yahoo.com/q/bc?s=TNA&t=5d&l=on&z=m&q=l&c=BGU%2CEDC%2CTYH%2CFAS%2CERX%2Csoxl

  • Joe

    Semi's ran up the most so now they correct the most … it's not too much of a mystery. As I said in a previous comment thread, I'm buying in the healthcare industry groups.

    Semi's and other tech stocks will have a second push up but they have to rest for a bit.

  • Jesse

    there were multiple bearish indicators. one was that we broke under the long term(6 month) bull flag. that signaled a sell. not to mention the long term market indicators were telling in spades that this was coming. My favorite is the STO. the longterm STO rolled over and broke, signaling a 75-150 point sell off was coming in the SPX. That indicator works every time.