Markets Tests Monthly Moving Average

Jan 7, 2008: 8:22 PM CST

It’s relatively rare when a monthly trendline or moving average is tested by the major US Stock Market Indexes, but we currently have the Dow Jones testing the rising 20 period moving average, which either reaffirms or threatens the strong uptrend that’s been in place since 2003 at the same time the S&P 500 appears to be slicing through the average.

Typically, price retests this level once per year. A “test” occurs when price approaches or equals the value of the key moving average.

We saw two tests in 2007 which failed to retrace to the average, and we are already seeing a clean test in 2008.

The last three months have seen steady declines in the index, which has taken the Dow Jones from an all time high of above 14,000 to 12,900. The month of January alone (which is comprised of less than a week) shows the Dow Jones losing 437 points.

The S&P 500 is experiencing an ‘intra-month’ breach, which will only become significant with a close beneath this average at the end of the month.

Looking back on the chart, each time the market has tested this zone, a nice and profitable buying opportunity occurred. Will it happen again this time?

Or will the market finally break the average and begin a fresh downtrend?

If there are clues from the daily chart, the market appears to be at key support zones, which if broken, will likely lead to at least a retest of the rising 50 period moving average on both major markets.

It’s also possible that a descending triangle is forming, which isn’t necessarily a ‘bullish continuation’ pattern.

Nevertheless, the market stands at a key zone at the moment, which has successful inflected off this level before… but will the third time be the charm the bears hope for?

4 Comments

4 Responses to “Markets Tests Monthly Moving Average”

  1. Stock Market » Markets Tests Monthly Moving Average Says:

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  2. jacksoo Says:

    Interesting stuff – as always! Also notcied how rare it is to get 3 negative motnhs in a row (see how Jan ends) – need to go back to 2004 and then of course bear market 2001/2002.

  3. Corey Rosenbloom Says:

    Jacksoo,

    Absolutely. The occurrence is frequent in bear markets but is extremely rare in bull markets. Either this is a nasty correction… or the start of something more sinister.

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