Es and the 20-Day

 | Mar 08, 2012 | 2:30 PM EST  | Comments
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Given the constant chatter regarding the S&P 500 and its positioning with its 10-and 20-day simple moving averages, I thought it would be worth taking a look at previous uptrends and analyzing how things played out in those situations, using the Es futures contract as the instrument of study.

The chart below covers the rally in the Es from July 2009 through mid-January 2010, and while there was clearly more volatility during that period than we have now, each and every correction during that time petered out and stabilized once the 20-day had been violated.

 

Es Daily: July 2009 to mid-January 2010
Source: eSignal

 

In the chart below you'll notice only one break of the 20-day, and this break ultimately resulted in a very meaningful drop in price. Put simply, aggressive sellers need to see a hard break of the 20-day (such as the one we saw Tuesday), followed by several days of volatile and choppy trading above and beneath said moving average, culminating in another hard break lower, but this time closing beneath the original breakdown day.

 

Es Daily: February 2010 to Early May 2010
Source: eSignal

 

The chart below references the rally from September 2010 through early March 2011, and you'll notice that the market experienced very little volatility (similar to the current period). There were three violations of the 20-day during this period, and again you'll notice that the third drop (in early March 2011) was the only one that ultimately closed beneath the low of the original breakdown bar.

I distinctly remember how concerned traders and investors where during late November 2010, but on Dec. 1 the Es spiked back above both its 10- and 20-day simple moving averages, and the next major leg of the rally that began in early September got under way. As you can see on the chart below, the Es spent quite a number of days churning beneath the 20-day, but again, the original breakdown bar was never violated (on a closing basis).

 

Es Daily: September 2010 to Early March 2011
Source: eSignal

 

Our final chart focuses on the rally that began in late December 2011 and continues on to this day. The Es broke decisively beneath its 20-day this past Tuesday, and since that time, traders have become noticeably more defensive (rightly so). Based on the three charts above I think we can make an educated guess that one of two things will likely occur over the next 5 to 10 trading days: The market will either spring to new highs (probably within the next couple trading sessions) or it will bounce above and beneath its 20-day, ultimately breaking beneath Tuesday's low and dropping significantly further.

 

Es Daily: December 2011 to Present
Source: eSignal

 

A very important part of trading is putting aside what you want to happen, and focusing more intently on what appears most likely to occur. I am not an especially bearish or negative individual. In fact, every position I hold in longer-term accounts is long. That being said, from a trading standpoint, and the standpoint of someone who prefers a respectable amount of volatility, I would obviously prefer that the Es ultimately break down through Tuesday's low. Should such a situation occur, I believe a swift correction back toward the low to mid-1260s would commence.

Now, as for what I believe is most likely to occur, until Tuesday's low is violated (on a closing basis), active traders must continue to give our resilient dip-buyer the benefit of the doubt and either look for reasons to buy intraday dips, or focus on strong stocks that only seem to only trade higher. Those sporting a Yogi-inspired bear suit have the option of selling short against upside resistance (1366 and/or 1371-1372 on the March contract), or stepping aside until an obviously more aggressive and motivated seller enters the fray and the Es closes back beneath Tuesday's low (1338.50 on the March contract and/or 1332.75 on the June contract).

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