What Does History Tell Us About Weak Profiles Near The 200-day?

NOT ALL MOVES ABOVE THE 200-DAY ARE CREATED EQUAL

As the historical examples below clearly demonstrate, after a plunge in the stock market and within the context of a still weak long-term trend profile, seeing the S&P close above its 200-day moving average is far from an “all clear” signal. As covered in recent CCM weekly videos and shown below, the S&P 500 traded above its 200-day after making a low in October 2011.

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WEAK TRENDS AND MOVES ABOVE THE 200-DAY

The CCM Trend Strength Model is a major component of the CCM Market Model. Trend strength scores are based on 207 binary questions using data from multiple timeframes. In late October 2011, the S&P 500 closed above a flattish 200-day moving average. However, the trend strength (TS) score was only 9 on a scale of 0 to 100, with 100 being the strongest. With a TS score of 9, the S&P 500 failed to hold above the 200-day and subsequently dropped 9.84%. The TS score of 9 told us the market’s longer-term trend still had some work to do before allowing for a more favorable risk-reward setup. When the market was ready to put together a sustained rally, the TS score was sitting at 82 in late December 2011.

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TRENDS TYPICALLY NEED TIME TO FLIP

A similar situation occurred following a plunge in 2015; the S&P 500 rallied sharply back to the 200-day moving average.

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CLOSER LOOK AT 2015 CASE

The initial push above the orange 200-day in 2015 was marked by eight trading days of gains before the market started to drop back toward the moving average cluster (chart below). The S&P 500 closed 2.41% above the point where it crossed the 200-day, telling us short stays and relatively tame moves above the 200-day are not necessarily “everything is fine” signals. Price stayed near the 200-day for seventy-one calendar days.

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Similar to the 2011 case, the initial push above the 200-day occurred within the context of a relatively weak TS score of 17. From the highest close above the 200-day in early November 2015, the S&P 500 dropped 13.30% and exceeded the previous plunge low that was made in 2015. Notice how the S&P 500 was trading near 2100 in November 2015.

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Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit ...

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