Moving Averages Are Flashing Caution — Not Confirmation

Several weeks ago I brought to your attention price breaking below its 50 day moving average and how that was an early alert to a potential trend change (bull to sideways bull). Now it looks like price is headed toward breaking its 200 day moving average. What that will do is release a fair amount of blathering about the potential of a “death cross” - 50 day break below its 200 day moving average. First, to be clear, as noted weeks ago price breaking its moving averages - up or down - should be viewed as an alert to a potential trend change - which is exactly what I was references weeks ago. Now that price seems to be headed below its 200 day moving average (see chart) the cautionary gene in a prudent investor is heightened.

But that is all it is. A cautionary sign that a trend change - this time from bull to bear - may be on the near term horizon. Now, here’s where the blathering class comes into view.

Crosses - death or golden - have a modest predictive value. What converts death and golden crosses from modestly predictive to more reliably predictive is when the SLOPE OF THE MOVING AVERAGES TRENDS IN THE DIRECTION OF THE CROSS. As you can see from the chart, that is months away.

Importantly, what portends the cross AND the slope trending down is the sideways/distributional pattern stocks have taken these past months. This should be viewed as an critical cautionary sign.

So, where are we?

The set up is in place.

1 - Price has trended sideways for a reasonable period of time.
2 - Price has broken one and soon likely both of its major moving averages.
3 - 50 day appears to be headed toward breaking its 200 day - a/k/a death cross.
4 - The slope of both moving averages MUST trend down.

If all four steps occur then the fifth and final step comes into play: time confirming that the break holds. How much time? 30 to 60 days. But we can get to that if we get there.

So, when the blathering class comes to town on your favorite financial media channel belching about death crosses and the need to repent try to take the above into consideration.
 

(Click on image to enlarge)

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