Tuesday, February 9, 2010

S&P 500 at the Crossroads

I wasn't planning a post, but a milestone has been reached in a particular signal that is worth noting.  The previous post I looked at the S&P 500, SPX, with a very simple view of the 20d, 50d, 100d, & 200d simple moving averages, commonly known and used.  Fortune8 mentioned sma crosses, specifically the Golden Cross (50d/200d sma), so I reviewed that in the subsequent comments of that post.  However, the SPX is now on the verge of another cross, which I follow and consider a reasonable intermediate signal: the 25 day / 50 day simple moving average comparison.  Below is the SPX daily chart:

The 25d sma is in white and the 50d sma is in yellow.  As can been seen, the 25d sma is on the verge of dipping below the 50d sma on the SPX.  The idea of this signal is if the 25d > 50d, buy/long, and vice versa for the sell/short.  I normally consider this an intermediate term signal, a rather slow signal not suitable for hyper, fast money day traders, lol.  However, it is a good indicator of a bull or bear market for a particular index or stock.

To make this easier to visualize, I have converted the MACD histogram to also reflect this relationship.  So if the modified MACD histogram is above the baseline (white) that is bullish, and if below that is bearish (yellow).  Therefore, there is now a miniscule (microscopic?) 0.26 difference between the 25d sma and 50d sma, indicating the SPX is at a crossroads between bullish and bearish, long and short, signals.  The 25d sma = 1110.46 and the 50d sma = 1110.20, hence the 0.26 immaterial variance.

This signal has been consistent & clear, indicating a bull market, since late July 2009 when the SPX was in the 920s.  So, if this signal was utilized, now would be the time to take profits in the 1070 area -or- at least use this as a barometer of overall market status, which is now neutral.  Therefore, using moving averages as an indicator of price strength and the difference between the 25d sma and 50d sma as an indicator of trend and momentum, shows the market is at a crossroads.  This indicator is neutral - 1) bounce and rally? 2) consolidation? or 3) further pullback and correction?  Regardless, from this intermediate 25d/50d signal, it is time to sit out for the interim and see how the signal develops, from an intermediate term SPX trading perspective.

The DJIA has already crossed over slightly to the bearish side, that is the 50d > 25d.  The Russell 2000 still has the 25d > 50d, but not by much, as is the QQQQ.  Therefore, all can be considered neutral along with the SPX.  Some more daily charts:

The mighty Apple, with a cult following, including me when I'm long and making money on the stock, lol.  A buy/long signal was generated in late March 2009 and the race was on - until a sell/short signal just before Christmas 2009.  Another breakout, and buy/long signal, occurred a couple of weeks later, in January 2010, but right now doesn't look promising without another bounce.  AAPL price strength has been amazing, however.  Even more amazing is the XLK, the technology SPDR, which had a buy/long signal from early April 2009 until just last week, early February 2010!  XLK now has a sell/short signal.

The great Goldman Sachs, hated to the point that websites are dedicated to spew insults specifically at them, lol.  A sell/short signal was generated in mid-November 2009 and remains intact.  GS price has not recovered, although volumes have been written on the Internet speculating about this price decline mystery.

Of course, this signal doesn't work clearly for every price chart.  XLF, the financial SPDR, is an example of late.  A chart in consolidation (or confusion?) doesn't generate clear and consistent signals.

Obvioulsy, one signal does not make a trading system.  However, this simple signal does show price strenght and trend to utilize as a complementary technical indicator.  The great benefit of technical analysis, be it simple or complex, is that all news & data, internal & external variables, have already been priced in.  Good Luck!

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