Sunday, October 25, 2009

S&P 500 Moves Towards Its 500 Day Moving Average

The S&P 500 is quickly approaching its 500 day moving average as seen below:

s&p500 approaching its 500 day moving averageIt is easy to see why this is an important technical level. Throughout the bull market of the 1990s and 2003-2007 bear, the market stayed above this level. The market also stayed below this level during the bear market of 2000-2002 and the current bear market. In the next month we should be able to tell if the market is able to break through its 500 day moving average, thus indicating a new bull market, or if it is rejected. A rejection could be harsh, with a drop below the 666 low reached in March a very real possibility.

Which way will it go? We think the markets have not hit their lows yet for this cycle so we expect the 500 day moving average to act as overhead resistance. Anything can happen, however, and with the massive government interventions taking place over the past year, technical and economic indicators that were reliable in the past need to be questioned. Market participants are watching these sort of momentum indicators so a breakthrough or rejection is likely to cause a big market move in either direction. We will keep a close eye on this indicator and post an update when a decisive move has been made.
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