SP 500 Tests Major Monthly Moving Average

With all the rampant volatility of the last few days, it’s easly to lose focus on the larger structure.  Tuesday, the S&P 500 tested its 200 month moving average – Wednesday, it broke it.  Let’s view the monthly S&P 500 and Dow Jones Index charts.

S&P 500 Monthly:

After price violated the 50 month EMA to the downside, the eventual initial target was indeed the rising 200 month SMA – I’m just shocked at how quickly it happened.  We’ve lost 300 S&P points in just over one month – a remarkable and stunning development.  We’ve also blown through the well-known large-scale Fibonacci retracements as well – almost as if they weren’t there.

Price is now back to levels not seen since 2003, and there’s the great potential that if you put money to work at virtually any time since 1998, you are currently underwater (have lost money).  I cannot underscore how staggering that sentiment is – to be fully invested for 10 years and have little to nothing to show for it.

Also, the momentum oscillator has made a multi-year low.

Dow Jones 30 Monthly:

The picture is similar here, with the exception that the Dow Jones outperformed the S&P (and NASDAQ) in terms of exceeding the 2000 bear market highs (in this case, by around 3,000 index points).  Price has still fallen precipitously, has made a significant new momentum low, and is also likely headed to test its rising 200 month SMA.

The prevailing thought among traders and many professionals is that the market is ‘overdue’ for a technical (corrective) rally to work off some of these oversold conditions and ‘internal’ indicators (as well as near record high VIX readings). While we will get a rally ‘eventually,’ Dr. Steenbarger of TraderFeed recently addressed this topic in his must-read post “The Financial Panic of 2008:”

“Normal historical indicators of market bottoms are broken. We cannot count on market rallies simply because we are oversold, even though those oversold levels may have represented past opportunity. As long as money flows are negative and traders are hitting bids in size, weak markets will get weaker;”

I must confess it has surprised me deeply that the Rescue Bill in Congress failed to lift markets higher, and this morning’s surprise 50 bps rate cut (as of noon) is also failing to lift markets higher.  I find myself with an irresistible urge to put on a long (buy) swing position (I’m primarily an intraday index futures trader), but every morning I want to try that, the market has opened lower or sold off on the day, preventing my greed from taking over (and violating my core trading strategies).

Steenbarger is right:  “We cannot count on rallies simply because the market is [grossly] oversold.”

It’s rough – on both sides.  Shorts aren’t loving this and neither are longs.  The market is making stunning swings in both directions, often without provocation.  Also, what we feel like justifiable provocation often turns out to have the opposite effect than was expected – even if expected by a large consensus.

These are very, very difficult trading conditions and you shouldn’t beat yourself up if you feel you need to stand aside, especially if you are a swing or position trader until conditions become more favorable.

Stay safe and keep capital preservation as your #1 goal.