Some studies suggest that the S&P 500 will pullback instead of retesting its February 9 low. Other studies suggest that the S&P will retest and make a marginal new low in the next few weeks. The point is, the stock market will face short term weakness in the next few days/weeks.
The S&P merely touched its 200 daily moving average on February 9 (see blue line in the chart above).
Some traders think that the S&P MUST retest and close below its 200 daily moving average before this “small correction” can be over. I disagree. While most historical 10%+ “small corrections” do close below the 200 sma, some don’t. Here are those cases.
1999 and 2000
1996 and 1997
Most of these historical cases saw the S&P close below its 200 daily moving average. The 2 exceptions were in 1955 and 1997.
Based on this study, the S&P will probably close below its 200 daily moving average before this “small correction” is over” in the next few weeks (i.e. retest the February 9 lows). Keep in mind that the S&P’s 200 sma is going up right now. It’s currently at 2550.
I think the current case might be an exception, like 1955 and 1997.
- Those “small corrections” did not reconnect with the 200 sma because their preceding rallies were too strong. The S&P was too far above the 200 sma that even when it did make a 10%+ “small correction”, the S&P couldn’t reconnect with the 200sma.
- The rally before this current “small correction” was too strong. The S&P was too far above its 200 sma.
So although history suggests that the S&P will reconnect with its 200 sma, this time might be an exception to the rule. But with or without a close below the 200 sma, the stock market’s short term risk:reward is bearish. The medium and long term are decisively bullish. Focus on the medium and long term.