The 200 day moving average is fast approaching. Bears are hoping the markets melt right through it. Bulls are watching for support. Should SPY close beneath the 200 day moving average, the results below suggest the bears may want to cover their shorts and go long.
The 200 day moving average is widely seen as the bull/bear market demarcation. Trade above it and the bulls charge. Trade beneath it and the bears roar. In reality, it is not that simple. Most of the time the market doesn’t trade for an extended period of time beneath the 200 day average. Years such as 2008 tend to be the exception, not the rule.
With the market quickly approaching the 200 day average, I wanted to see if a close beneath it would be a good short signal.
SPY has traded above the 200 day moving average for 190 days. While this may seem like a long time, on 8.26.1998, SPY had traded above the 200 day for 525 days. Anyway, the setup requires that SPY has traded above the 200 day for more than 100 days.
- Setup (as described above) has occurred
- Buy SPY at close when it closes beneath the 200 day moving average
- Sell X days later
- No commissions or slippage included
- All SPY history used
Summary of Results:
Sample size is small here, with only 8 occurrences. However, all 8 were winners.
Requiring ONLY a close beneath the 200 day average (the blue line) results in 25 occurrences, which gets closer to possible statistical significance.
I wondered how this system could produce 100% winners, especially after trading through 2008. What I noticed is that the first time the market breaks down beneath the 200 day average, it tends to bounce. Subsequent breaks of the average is when the serious damage can occur. As the system only holds for 50 days, it has managed to avoid the slide into Armageddon.
Bottom line: Ignoring the small sample size, the markets may be setting up for a trade with a significant bullish edge.