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MOVING AVERAGES


SPX Breaks 200-Day Moving Average—Again

06/13/06 01:17:10 PM
by Arthur Hill

The S&P 500 broke its 200-day moving average for the fourth time in two years. Despite these breaks, the bulls recovered and the index moved to new highs each time.

Security:   $SPX
Position:   Hold

Can the Standard & Poor's 500 recover from the recent break of the 200-day moving average? We can never be certain, but a look back at prior breaks and recoveries can tell us what to look for to turn the S&P 500 bullish again.

The S&P 500 broke the 200-day moving average in July 2004, April 2005, October 2005, and June 2006. There were also breaks in September–October 2004, but these occurred just after the July 2004 break and I will focus on the first break. The July 2004 break was the deepest and lasted for over a month. In contrast, the April 2005 and October 2005 breaks lasted less than a month and the S&P 500 stabilized just below the 200-day moving average. The current break is only a few days old. (See Figure 1.)

FIGURE 1: S&P 500 AND THE 200-DAY MOVING AVERAGE. The index broke the 200-day MA a number of times in the past few years.
Graphic provided by: MetaStock.
Graphic provided by: MS Quotecenter.
 
There appears to be a similar pattern at work on each break. The actual moving average break occurred with a sharp one- to three-month decline. In addition, the decline formed a steep falling price channel (black trendlines). The channel lines are not exactly parallel, but there is a clear zigzag lower, and the upper trendline marks resistance.

Each reversal occurred with a sharp move back above the moving average and a break above the upper trendline. The current decline is around one month old, and it is possible to draw the upper trendline extending down from the May high. As long as this trendline and the 200-day moving average hold, the bears get the upper hand and it would be prudent to wait for a break before jumping in on the long side.



Arthur Hill

Arthur Hill is currently editor of TDTrader.com, a website specializing in trading strategies, sector/industry specific breadth stats and overall technical analysis. He passed the Society of Technical Analysts (STA London) diploma exam with distinction is a Certified Financial Technician (CFTe). Prior to TD Trader, he was the Chief Technical Analyst for Stockcharts.com and the main contributor to the ChartSchool.

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