S&P Watch: Dramatic Shift for 200-Day Moving Average?

Here is a good read from Minyanville. As the market rolls over watch the 200 day moving average on the individual stocks as well as the indices.

Torture numbers, and they’ll confess to anything.

The S&P 500's 200-day simple moving average -- the one that everyone has become so accustomed to -- is in for a dramatic shift soon.

Let’s go back to Statistics 101 for this. The 200-DMA represents the average closing price of a stock over the most recent 200 days. In the context of the market, 200 days means approximately 10 months.

Now let's take a look at the chart. As we roll over to July, the 200-DMA is going to start discarding the high readings of September and October, one day at a time.

Assuming the market stays in the vicinity of 900, that implies that a higher number is going to be deleted every day -- say in the 1100-1200 range -- and a smaller number will be added (in the 900s). This would force the 200-DMA to go down, one day at a time.

How is this information relevant besides as a mental exercise? Well, the 200-DMA "support" -- the one that the media has been so keenly watching -- is going to act "supportive" at lower levels.

Of course, if the market goes dramatically higher, there won't be much impact; and if it falls, the 200-DMA will go even lower.

There are many other implications, but this is an important one.This isn't actionable today, but it's certainly something to keep in mind over the next 2 months.

I know what you’re thinking: First, economics; now, statistics -- which incidentally was my favorite course, along with econometrics (Check out this post, on UNG, for more). Trust this content at your own peril.

Smita Sadana offers in-depth research on historical bear markets and provides you with 10 indicators she's found that together confirm the beginning of a new bull market. Learn them today so you know when it's safe to invest again. Bull Market Timer - 7 day money back guarantee.