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.
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. Currently, as you can see below, the 20 period monthly is still clearly rising on the S&P, and price has held above it during the recent correction since mid-September.
Clearly, this is not the holy grail or the end-all-be-all conclusive indicator for the market. However, it is another useful tool to eliminate noise and really focus on what the market is telling us. A major bullish to bearish reversal is historically a messy process and takes much longer to occur than seems reasonable. Thus far, if that is actually happening, we would only be in the extremely nascent stages of it. And we know that the 20 period monthly moving average has yet to support even that view.
Know your timeframe, though, as this is a monthly chart. The long-term bear case would see price breaking below the 20 period monthly within the next month or two, and then struggle to reclaim it as the reference point flattens out and eventually turns lower with price.
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3 Responses to Not Off-Course Yet
Have u looked at the 12sma on monthy? I like even better.
nice one, thanks