“Nothing good happens below the 200 day moving average.”
The 200MA is the institutional favourite for judging the worthiness of a stock for buying (or so I’m told). But what happens on an index level when an overwhelming majority of stocks are above or below this moving average?
Well, let me show you.
Below I have one of my recent studies encompassing 2000 through 2021. I used the Percentage above 200MA breadth and divided it into thirds at 33% and 66%. In this way, if the Percentage above 200MA is greater than 66% then there are 2:1 in “strong” condition and likewise, below 33%, there are 2:1 in “weak” condition. Note: the lower line in the charts below is at 40%, but after some thought, I decided an even third would not change the results much (but I’m not going to remake the charts for this small adjustment).
The idea is that ON AVERAGE, the more stocks within an index that are in a buy or sell condition by being above or below the 200MA, the more buying or selling pressure and the stronger the dominant influence becomes on the movements of the index (whether cap-weighted or not). As a stand alone buy condition, if more stocks are above the 200MA, then more stocks are hypothetically in a “buy condition” with the effect being a stronger more drawdown-resilient bullish trend in the index. Vice versa, when there are more stocks below their 200MA, then more stocks are hypothetically in a “sell condition” with the effect being stronger rally-resisting bearish trends.
Remember that these institutional guys don’t just buy a couple of stocks, they buy whole sectors. There’s a lot of money to put in play and it needs to be spread around a lot. That’s why in strong markets, even the crappiest stocks start to perform well.
I have highlighted the charts below in blue when in a “strong market” condition and highlighted red when in a “weak market” condition. Without further delay, here are the charts for your ponderance:
To add a few of my own observations on the BLUE highlights. Some of the strongest, seemingly straight up trends occurred when the “strong” condition was present. Virtually all of these rallies still treated the upper weekly bollinger band as resistance. A warning though…don’t forget the context because strong conditions were short-lived during bear markets (as evidenced by declining long-term moving averages and declining price structures) and were actually the BEST shorting opportunities.
Conversely, in periods with RED highlights, the strongest, seemingingly bottomless trends were the norm. In these cases, weekly bollinger band support be damned, price broke through and fell like a rock most of the time. Once again though, context is important, these red zones were IDEAL buying opportunities when longer-term moving averages were still climbing and price structures were strong on a longer-term basis.
Additionally, note that during periods where %200 breadth was BETWEEN 33% and 66%, it usually resulted in wide range chop. A long-term trend could not seem to get underway without a definitive “lean” towards one side being in power.
As of Friday’s close, the percentage of stocks in the $SPX that are above their 200MA’s is at 39.6% as per stockcharts.com. The potential is certainly there for the wheels to come flying off this thing. I believe this breadth measure is available on our very own SlopeCharts under the symbol $SPX200MA
Unfortunately, I cannot say where price will go from here. As I’ve shared other times, the current levels of implied volatility and price location have MOST OFTEN led to rallies with SOME having the floor fall out. There’s really no way to tell that I can identify other than to follow what price does and which levels get taken out. In this case, we can also watch what is happening in market breadth as an additional information source. I admit, it is hard to fathom what would be a trigger for relief other than the war suddenly ending. It would seem that the negative influences to company earnings and economic reports are only just starting and destined to get worse before they get better.
They say that every correction/decline occurs with a story. This one is not lacking a storyline having started with quantitative tightening and rate hikes and has recently added war between Russia and Ukraine with worldwide sanctions that threaten to snowball into losses for numerous companies and strap a booster rocket to inflation that will dramatically increase everyone’s cost of living oh my god I’m out of breath! GASP!
Looking at the S&P500, the wedge is still in place and allows for a rally IF triggered. However, I notice now that it appears the neckline on the Head & Shoulders pattern has now been BROKEN (thick black line) with apparent tests to regain the level on Wednesday, Thursday, AND Friday with no luck. Why haven’t I seen ANYONE talking about this? FOMC is this week on Wednesday. It’s hard to say if the market will hold on until then, but for myself I’m drawing my limit at least week’s low. If last week’s low gives out, I will be on the “Head & Shoulders is complete” bandwagon and looking for $380-390 as the target for SPY.
Good luck this week, Slope!
