Daily Traders Edge

Opinion: This market can’t go sideways for long, so get ready for a breakout or breakdown

February 08
10:22 2019

Stock investors and traders should pay attention to how the S&P 500 reacts to the 200-day moving average (the average closing price of the S&P 500 (SPX) over the last 200 days). Generally, it’s bearish when the SPX is below its 200-day moving average, and vice versa.

The SPX SPX, -0.73% fell below its 200-day moving average last December 4, which caused massive selling by hedge funds, high-speed computer programmed algorithms, and regular investors.

Since its December selloff, the market has made a remarkable but questionable (more on that later) rebound to its 200-day moving average. This is a major pivot point, or in technical analysis, a major resistance point.

When the market is at a major crossroads like this, it’s too risky for traders to place a bet on which direction it will go. If the SPX moves strongly higher from here, that would be bullish. If the SPX fails to move much higher and reverses direction, that would be bearish.

A wait-and-see approach is the most prudent. The great stock speculator Jesse Livermore made the most money when he correctly identified the market’s pivot points. He also lost a lot of money by plunging in too early. In this way, Livermore learned not to place trades before the pivot point, but instead to wait until he received confirmation of the market’s next move.

In other words, first see how the market reacts as the S&P 500 straddles the 200-day moving average. To help you decide what action to take, if any, here are some bullish and bearish views of the current market:

The bullish view: After the December market shellacking, Fed Chairman Jerome Powell reversed course and the Fed became highly accommodative. The Fed hinted it would hold off raising interest rates indefinitely, and might even reinstate QE (Quantitative Easing) if necessary.

The suddenly dovish Fed, with help from the volatility-killing algos and the White House, propelled the market to its 200-day MA. So long as volatility remains low, the markets will likely drift higher, perhaps higher than anyone believes.

Other bullish U.S. market news includes the positive jobs report, low unemployment, and low interest rates. In addition, investors who didn’t panic in December and held their stock positions were rewarded. Therefore, few investors are selling now as the market keeps rising.

Continue Reading at Market Watch

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