S&P 500 Pause or Failure at Resistance?

The 200 day moving average is often viewed as a key technical marker for a bull or bear market. However, it is clear that the price of an asset class simply closing for a day or two above or below this level does not signal an all clear signal. This chart shows the SPY daily price action (the ETF for the S&P 500). One can see that in mid-June we briefly broke above the 200 day moving average (blue line)for about 4 days only to break back down. This week we again have been trading above the 200 day moving average only to see a very bearish price reversal (price started up for the day then went down dramatically suggesting the bears had gained control) today as of early afternoon on some deflationary comments from a member of the Fed. I think it is too soon to conclude that we are now back in the trading range of S&P 1040-1120 of the past few months as many technicians felt we needed to consolidate a bit after a rapid run up last week. If we are to continue higher from here, I would look toward the white lower trend line that I have drawn as a possible level of support where we would have a new higher low to follow the higher high in price three days ago. Uptrends tend to be marked by oscillating prices between higher highs and higher lows. The pattern remains consistent with that possibility unless that trend line is violated.

I quote this portion of a recent post here--"A word of warning, however. I am not a believer in the predictive value of stock market moves to necessarily provide a 6-month guide into our economic future. After the bear market began in early 2008, the S&P 500 went back above the 200 day moving average twice in May 2008, before then descending on a long term downward path. Clearly, early May 2008 was a dangerous time to get back into the market without a risk management plan. Even for long term investors, I would tread similarly here back into the market with a defined risk (i.e. stop loss) such as the ones suggested above."

So here we are in the early spring/summer of 2010 with two failures to hold the 200 day moving average. Continue to use good risk management if you are going to expose yourself to market risk. I have found that lagging a move above a key resistance point or moving average cross by several days or 1-2% (waiting before buying to make sure the price holds above key technical levels) dramatically increases long term returns and reduces volatility in simulated trading models of the S&P 500 and other major markets.