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


This support is going to act supportive at much lower levels.

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.

Click to enlarge

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.
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No positions in stocks mentioned.

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