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May 26, 2020, 11:04 a.m. EDT

Stock-market bulls cheer as S&P 500 trades above 200-day moving average — what comes next?

History suggests move above resistance might not be the gateway to an extended rally

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By William Watts, MarketWatch

This is an updated version of an article originally published on May 22.

The S&P 500 topped its 200-day moving average in early trade Tuesday, but history suggests the move might not be a green light for an extended rally.

A move above or below a 200-day moving average — a proxy for changes in an asset’s long-term trend — is always closely watched by traders, but the S&P 500’s long courtship with that key level, as it bounces back from its bear-market plunge, had become something of a fixation on Wall Street.

‘A breakout is not likely to come easily and we expect a dogfight here around the 200-day.’

Kevin Dempter, analyst at Renaissance Macro Research

The focus on the 200-day might be enhanced by the fact that the average stood Tuesday at 2,999.81, according to FactSet, just a whisker below a big round number.

Stocks opened with strong gains Tuesday as traders returned from the three-day Memorial Day weekend. The S&P /zigman2/quotes/210599714/realtime SPX +1.05% rose 60 points, or 2%, to 3,016, while the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA +1.44%    jumped over 600 points, or 2.6%.

Dogfight’

“The fact that the S&P 500 is coming off a 35% rally and that this 200-DMA lines up with a nice even 3,000 number seemingly makes this area especially important,” said Kevin Dempter, analyst at Renaissance Macro Research, in a Friday note. “A breakout is not likely to come easily and we expect a dogfight here around the 200-day.”

Read: Are stock investors too complacent about a full-scale blowup between China and the U.S.?

The S&P 500 closed at a record high on Feb. 19, then began a breakneck plunge as worries over the coronavirus outbreak began to grow. The selloff continued through March 23, with the large-cap benchmark ending around 34% below its all-time high. Since then, it’s bounced back sharply, ending Friday 12.7% below its high. But the 200-day moving average has looked more like a cap after the index first approached it around three weeks ago.

‘Trapped between time frames’

At the same time, it’s held above its 50-day moving average, a metric used by traders to gauge an asset’s short-term trend. In other words, stocks are “trapped between time frames” wrote Jason Goepfert, head of SentimenTrader and founder of independent investment research firm Sundial Capital Research, in a Friday note (see chart below). Through Friday’s close, the index had remained between the 50- and 200-day averages for 21 straight sessions.


SentimenTrader

Since 1928, there have been 29 streaks that have stretched to at least 20 days — and 21 of them ended with the S&P 500 falling below the 50-day average, while only eight ended with a push above the 200-day, he noted, making for a roughly 72% probability the index will break down.

/zigman2/quotes/210599714/realtime
US : S&P US
3,185.04
+32.99 +1.05%
Volume: 2.41B
July 10, 2020 5:09p
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/zigman2/quotes/210598065/realtime
US : Dow Jones Global
26,075.30
+369.21 +1.44%
Volume: 337.36M
July 10, 2020 5:09p
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