Of all the technical indicators and economic signals we have access to, too often we
forget that the best indicators are the simplest ones. Today I think it's fitting
that we revisit the 200 day simple moving average, since for the third time in as
many months, it's been the stopping point for our rallies.
We have talked about the 200 day simple moving average before (in the
http://63.147.211.35/document.jsp?documentid=940 November 29th TrendWatch), but as a
quick reminder, let's recap exactly why this painfully simple line is of such
interest. First, none of the major indices has been able to stay above the 200 day
line since September of the year 2000. If that date rings a bell, it's because that's
when the market tried to recover from huge losses in early 2000, only to fail and
continue falling to where we are today.
Secondly, we keep our eye on the 200 day simple moving average because it points in
the general direction the market is going. If it's headed down, so is the market. If
it's slanted up, then so is the market. For reference, the 200 day line started
pointing lower in (lo and behold) September of 2000, and hasn't even come close to
moving higher again. That was the first time we saw a falling 200 day line since
1994.
We have threatened to cross it a couple of times since then, but each time we try and
fail typically results in further declines. Which brings us to today??
Most of the major indices are making this pattern, but we'll use the Nasdaq Composite
as our example. We tried to cross the 200 day line in late November, and failing to
do so brought further losses. Again in early January we tried to surpass it, only to
be set up again for a dip. Now in late February we find ourselves for the third time
inching up toward the 200 day simple moving average. At the time of this writing, the
composite is at 1330 while the 200 day line is at 1356. We've been teetering here for
a few days. Our fear is that if we do fail to cross it now (if we go 0 for 3), that
may be enough to send discouraged investors to the sidelines, convinced a bull market
is not a possibility. This is a bitter irony, since if they're not willing to buy,
then they're right - stocks won't climb. The additional concern is not just a lack of
a bull market. It's that these failures lead to pretty harsh downturns. Keep an eye
on the 200 day line over the next few days.
NASDAQ COMPOSITE WITH 200 DAYSIMPLE MOVING AVERAGE
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