This Chart Speaks For Itself

Image of an old straight razor representing the precarious position of the stock market on a technical basis
The Razor’s Edge
February 5, 2019
Document stamped fail representing a recently failed test of the stock market's technical resistance.
The Market Is Testing Resistance & Support
May 29, 2019

In my last post, I mentioned that the S&P 500’s current test of its 50 Week Moving Average (50 WMA) off of its 200 Week Moving Average (200 WMA) was significant. This week’s test failed. Although the index breached the 50 WMA briefly, it ultimately ended the week below it. This weighed on my mind, so I wanted to see just how significant this might be.

It appears that it could be very significant. As the chart below shows, since 1985, the 50 WMA has provided exceptional support and the 200 WMA has only been touched or violated from above a handful of times. In fact, if we group the instances into general periods of testing/retesting, this is only the eighth (really seventh, but I will count the questionable test in 2004 for the sake of argument) time in 34 years that the 200 WMA has been visited from above.

What is interesting to me is that, in each of these infrequent visits to the 200 WMA, retaking the 50 WMA from below marked the start of pretty substantial rallies. However, when the 50 WMA turned into pinpoint resistance as it did in 2001 and 2008, the index experienced precipitous declines in the weeks and months to follow.

Only time will tell if history is a guide in this case, but if the index can’t get and stay above the 50 WMA, it may be an indication of substantial trouble ahead. On the other hand, if the index manages to convincingly retake the 50 WMA, it may indicate renewed life for this ailing market. Either way, it appears that we find ourselves at a significant fork in the road.

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