If we look at the four ETFs that track major stock market indexes displayed in Figure 1 – DIA, SPY, IWM and QQQ – we find that three are either flirting with or already below their respective 200-day moving averages and the 4th (QQQ) is threatening to break down through a key technical level.Figure 1 – Indexes “on the brink”
We “technical analysis types” make a big deal out of crosses above and below the 200-day moving average. In reality there is nothing “magical” about this average. I mean, why not 176 days or 215 days? The implication is always that if a particular index breaks below its 200-day moving average then a major bear market is about to unfold. That’s not exactly the proper way to look at. Moving average don’t “predict” anything, they just tell you the trend “right now.” Which, as it just so happens, is pretty valuable information. I mean if the trend of the stock market isn’t bullish then why would I want to be fully invested?
There are three key things to remember:
1) You cannot have a major, long-term bull market while price is below the 200-day average;
2) You cannot have a major, long-term bear market while price is above the 200-day average;
3) Whipsaws are a fact of life when dealing with moving averages – i.e., not every break above or below the 200-day average will end up being significant.
The bottom line is this:
The more indexes that drop below their 200-day average and the longer they spend below said averages the greater the danger of a more serious bear market decline. So it pays to pay attention.