On Friday, July 2, 2010, the S&P 50 MA crossed below the 200 MA. Investopedia explains this phenomenon, “…as long-term indicators carry more weight, this trend indicates a bear market on the horizon and is reinforced by high trading volumes.
Additionally, the long-term moving average becomes the new resistance level in the rising market.”
This has not been a frequent event. In fact, Ron Griess and Mark Cremonie at TheChartStore.com provided a chart posted at www.thecrosshairstrader.com listing the dates and results of these events between 1933 and 2007. There were 28 such SPX Death Cross events with varying results. Only seven of these were more than 15% lower one year later. And, three times the SPX was more than 15% higher one year later.
Jerome “Mel” Hickerson wrote an article on July 3, 2010 about this event at www.advicetrade.com. He noted that the SPX lost 8.5% between June 21 and July 2. His investigation yielded only 30 times in the past 60 years where the SPX has dropped that hard in just two weeks. He stated, “11 of the 30 have occurred since September 2008. 2/3rds of the time the market bounces the following week, by an average of 4.25%. But, that stat is a bit misleading because the 1/3rd of the time that the index doesn’t bounce back, it declines by an average of -10.97%.” Mr. Hickerson concludes with an opinion that “the significance of the Death Cross may be overstated. There have been eight such crosses since 1990. Six times there was NO pullback of any kind; the market rallied until the Golden Cross [50 MA crossing above 200 MA] occurred. The other two occasions the SPX still bounced both times in the days after the cross (average of 24 SPX points.)”
At the time of this writing, the SPX has risen 28 points from its closing price on Friday, July 2. It appears that the initial bounce that Mr. Hickerson expected has occurred. It remains to be seen if it will continue to rise farther.