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 +0.45% rose 60 points, or 2%, to 3,016, while the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA +0.36% jumped over 600 points, or 2.6%.
“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.”
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.
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.