Study: the stock market will probably fall to its 200 sma


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.

2012

The S&P closed below its 200 sma in this 10.9% “small correction”.

2007

The S&P closed below its 200 sma in this 11.9% “small correction”.

1999 and 2000

The S&P closed below its 200 sma in the 13.1% “small correction” (1999) and 10.3% “small correction” (2000).

1996 and 1997

The S&P closed below its 200 sma in the 11% “small correction” of 1996.
The S&P DID NOT close below its 200 sma in the 10.2% “small correction” of 1997.

1990

The S&P closed below its 200 sma in this 11.3% “small correction”.

1986

The S&P closed below its 200 sma in this 10.2% “small correction”.

1967-1968

The S&P closed below its 200 sma in this 11.7% “small correction”.

1965

The S&P closed below its 200 sma in this 10.9% “small correction”.

1955

The S&P DID NOT close below its 200 sma in this 10.5% “small correction”.

1950

The S&P closed below its 200 sma in this 14% “small correction”.

Conclusion

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.

  1. 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.
  2. 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.

14 comments add yours

  1. I also think it may not go below the 200 SMA. Previous rebound is too quick that I am not even fast enough to buy. So, I will act faster and buy even before it hit 200 SMA. If many other people is in the same boat, then it won’t even get to 200SMA. If it does, then it may need a couple up and down to clear investors like me who has been on the sideline for the past years waiting for the big fall.
    BTW, I read from ZeroHedge that someone suggest the strong V rebound is caused by FED buying the stock. He said all the pension fund will fail if the market drop more than 10% and remain for a short period of time. How likely do you think this is true?

    • Yes, I thought of that too. A lot of investors will want to front run the 200sma.
      I don’t think that’s true. The Fed would buy if stocks fell 20%, But not 10%. 11% corrections are completely normal.

  2. Hello Troy
    There is a 98 percent correlation between SP500 ( 2016 feburuary – right now )
    and Nikkei ( 1988 january – 1990 feburuary )
    If SP500 repeats Nikkei 1990
    It will keep sideway ( 2650 – 2750 ) until early-march and then plunge to 2150 by late-april
    It is very ominous
    Let us focus on during march 5 and april 20
    kind regards

  3. Maybe I’m reading too much into the short term, but it seems to me that day to day dips are consistently being picked up since the recovery plateaued last friday. It’s not immediately obvious (yet) that the markets want this pullback. I guess we’ll find out, but it’s definitely a risky moment to open a position in either direction right now.

    • I’ve noticed that too. But overall, I’ve found the stock market’s intraday price action to be pretty useless. Not consistently useful.

  4. Troy, u can also do a study how the market recovered/reacted after the 2010 flash crash. U might find some similarities

  5. The s&p futures touched the 200sma 2x but never closed below it. The spot spx only touched the 200sma 1x. This is important to notice, because if the spot spx trades back to the 200sma, while it would signal a double bottom on the spx, it would actually signal a triple bottom in es.

  6. Thank you for doing this study. I know I mentioned it last week to you and you where a little hesitant on doing so.

  7. Troy, I think u left out the study Paul Tudor jones used on the Friday before the crash of ’87. Where s&p closed below the 200sma, he got out and switched short right before the weekend started. How do we know if the S&p (closed) below the 200sma that it’s not a signal to get flat for an anticipated bigger decline like the crash of ’87 since 2017 was very reminiscent of ’87 in terms of momentum and direvitive financial products.

  8. Hi Troy,
    I do not understand why it needs to test the lows, for the correction to be over?

    • Some traders want to see a more complete sentiment washout. A double bottom correction tends to do that.

  9. Troy, it looks like the 10 & 30 year treasury note futures need to hit a crescendo bottom selloff on the weekly charts before we can get some upward momentum in the spx

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