There has been a lot of chatter lately about the 200-day moving average line and what it means if we break or hold it. My view is that a moving average line of a major index (or stock) if broken, is only important if the moving average line is rolling over. Or in the case of a break to the upside, if it is curling under.
Recently I have written about the now-rolling-over 50-day moving average. I have explained that when we look back 50 trading days ago and see that the S&P 500 is dropping that January run we know that the moving average line is rolling over -- and a rolling-over moving average line acts as strong resistance.
The 200-day moving average line is no different, it's just slower moving and therefore has more longer-term implications. With that in mind let's take a look at a longer-term (20-year) chart of the S&P 500 with its 200-day moving average line. The first thing I want you to notice is that when it is heading down (rolling over) it is resistance on almost every single rally. When it is rising it is support on almost every single decline. Even if broken, the breaks tend to be temporary.
Now let's take a look at some of those breaks up close.
In late August 1998 the S&P broke the 200-day moving average line. (Point A on the long-term chart). Looking back 200 days prior to the break, we discover it was November 1997 (red arrow on the chart below). It was a close call in that the S&P traded down to that zone but it didn't trade under it, so the moving average went sideways but never rolled over. Notice that the first trip back to it was resistance, though (also please notice the "W" pattern, just because!)
Now let's move to the year 2000. I know in your head you say, "big high in the market" and it was, but we're so used to looking at the Nasdaq high we forget how many months the S&P spent up at the highs. The breaks in February, April and May were so short-lived they were meaningless. Why? The moving average line was still rising!
Now let's turn to the break in September 2000. Two hundred trading days prior to that was December 1999 and what is the first thing you notice? The break down is right around the same price as what we're dropping. Yellow flag.
Next, look at the rally back to the moving average line in October. In October we're dropping January and January was clearly higher than October, thus the rolling over begins. Go back to the long-term chart, above, and see point B. See how every rally in that bear market failed at the declining moving average line?
Another interesting time to review is 2007. Look at the August decline -- 200 days prior was October (red arrow on the chart). The first thing we notice is that we were dropping numbers that were so much lower the moving average line didn't even have time to care so we plunged and moved right back over it.
Look at the break in November 2007, which arrived one month after the S&P 500 made its high. On the long-term chart this is point C; 200 days prior to the November break was January. Here we were looking at dropping the same price the S&P was trading at. Yellow flag. The rally in December stopped pretty much in the area of the moving average line.
Now glance back to March 2007 and see that huge ramp up the moving average line would be dropping going forward; you say to yourself, failure to get back over that line is going to roll it back over, just because of the math.
After the market finally bottomed and lifted in 2009, it did not fall back under the 200-day moving average until just after the Flash Crash of 2010. And what numbers were we dropping? August 2009, which was below where the S&P was trading. We attempted to cross back over the moving average twice and failed but in September, when it revisited the line, it would have been dropping late November/early December 2009 (blue arrow), which was similar in price, thus the chance of saving itself from rolling over was high. This is point D on the long-term chart.
We once again breached the 200-day moving average line in 2011. Two hundred days prior was October 2010 (red arrow). The first thing we notice is that the S&P fell below the numbers we were dropping and the numbers we were dropping going forward were going to be higher than where we were. Notice the moving average line rolled over. It was resistance until January 2012 (not shown).
By January 2012 we were dropping March 2011 so the numbers were more even. There were still those higher readings in April and May to be dropped but the challenge was not nearly as difficult as it was in August. This is point F on the long-term chart.
Finally let's check in on 2015. Once again, we broke down in August and this time we were dropping early November 2014 (red arrow). This was a clear example of replacing higher prices with lower prices and you can see how quickly and easily the moving average line turned down. You can also see how it was resistance on the rally, even if it didn't stop there exactly.
We did not cross back over the 200-day moving average line until March 2016 which was about nine or 10 months after we first went under it. By then we were dropping the August plunge so it was easier to move back over the moving average line.
This brings us to today and the now well-watched 200-day moving average line that we seem to be toying with day in and day out. 200 days ago was June (red arrow) so unless the S&P plunges under 2450 that moving average line is still rising. In my estimation it shouldn't matter that much now, similar to the plunge in August 2007. However, it would matter a few months from now because then we're set to drop numbers closer in price to where we are now.
The general rule is the longer the S&P (or any index or stock) spends in a trading range and then breaks down from there, the more negative it is because that has given the long-term moving average line a chance to roll over -- and rolling-over moving average lines are resistance on any rally.