Over at least the past two decades, the 20 period monthly moving average on the S&P 500 has been an excellent reference point for bull and bear cycles. When it is rising, you should generally be a bull for the foreseeable future, while you should be bearish when it is declining. When it smooths out, you should grow cautious and wait for resolution. As with all moving averages, it is important to note the slope of the reference point and not just whether price is above or below at any given time. Too often, traders completely ignore the former aspect, while getting caught up in the latter to their detriment.
Another important point is to keep the timeframe in mind for perspective, as multi-day or even multi-week trades can be made counter to the trend above. The 20 period monthly moving average analysis is extremely beneficial to your market posture during largely volatile periods of confusion. As an example, in the summer of 2010 we had a nasty 16% broad market correction. At the time, I posted a monthly chart like the one above over on Stocktwits, noting that even though the market was quite scary and sentiment horribly negative, all that was happening was a pullback to the still-rising 20 period monthly moving average. Note above that we found support right near that rising 20 period monthly.
Unlike the summer of 2010, when we never breached the 20 period monthly, this time around we did. That said, the moving average is still inclining (albeit at a lesser rate), which tends to bode overall quite well for bulls. Moreover, the buyers did an excellent job of quickly taking price back above it.
Based on prior market action, a longer-term bullish to bearish reversal should see the 20 period monthly moving average flatten out while price consolidates below it, before we eventually break lower. I am not impressed with the price action in the current market of late, but the bears still have plenty of work to do before I would say that we are back in a cyclical bear market.Facebook page