There are times when the market just moves along from day-to-day and us “junkies” might hang on every move but to the average investor what happens today or tomorrow is really not all that meaningful in the whole big spectrum of things.
And then there are times like now. As you can see in Figure 1, the major market indexes are struggling and are testing their respective 200-day moving averages. How this “dance” plays out may have important implications for virtually all stock market investors.
Figure 1: Courtesy AIQ TradingExpert
First off let me say this: There is nothing “magic” about a 200-day moving average. It was interesting that the other day when the S&P 500 Index closed below its 200-day average (it was the only major index to do so) roughly 22,367 articles appeared on the internet sounding the alarm. Now I do pay a lot of attention to moving averages, but more to get a sense of trend than as automatic buy and sell triggers. Which leads me to invoke:
- Jay’s Trading Maxim #81: Contrary to popular belief, a price drop below a “key” moving average does NOT imply the onset of immediate and total Armageddon.
- Jay’s Trading Maxim #81a: Um, but it could. So best to pay attention.
3 Possibilities
Actually there are a few others but the most likely outcomes – and the implications – are:
- A reversal back to the upside – If the major averages hold here above their recent lows. If this happens a strong rally to the upside is a strong possibility. Which is one reason it is too soon to “jump ship.”
- A breakdown by all major indexes – If a majority of the major indexes break down below their recent lows investors are urged to take defensive measure. Whether that involves selling shares/funds/ETFs/etc or hedging with options and/or inverse products is up to each investor.
- A whipsaw – One other dreaded possibility involves both of the above – i.e., the average break down far enough briefly to trigger a defensive action only to quickly reverse back to the upside. This often leaves a lot of investors standing there dumbstruck and unable to pull the trigger to get back in.
Like I said, this is a critical juncture. Whatever happens, investors need to pay attention and stand ready to, a) do nothing, or, b) take defensive action, or, c) take defensive action and then undo the defensive action and get bullish again (in the event of a whipsaw).
Steady, people, steady