Sticking the Landing

After nailing our next downside target yesterday, the S&P 500 closed below its SMA200.  This normally bearish signal attracted a lot of attention. So, I thought it might be interesting to see what past instances have looked like, and how serious an issue it might be for the market this time.

SPX has dropped and closed below its 200-day moving average 18 distinct times since its 2009 lows. The dips ranged from 1 day to 62 sessions, with the average being 18.  And, the extent of the subsequent cycle* move ranged from -14.35% to +2.15% with an average of 3.87%. The declines averaged 0.29%/day, which adjusted to “no change” when including head fakes.There were three head fakes, defined as a close below the SMA200 which was followed by a close back above it the very next day.  These losses would have been -0.07%, -1.80% and -2.15%, assuming one didn’t cover until the following session’s high.  Obviously, tighter stops would have meant much smaller losses.

If we toss out the three headfakes, the average decline of the other 15 instances was 5% over a period of 22 sessions.  A 5% drop from yesterday’s close would be 129 points, to 2451.  Interestingly, this is within a few points of our next downside target — should SPX fail to hold its SMA200.  Below that, things get really ugly.

If it does hold 2590, there’s a very good chance it’ll join the ranks of the head fakes.  With the futures up about 20 points on VIX’s potential drop through support, SPX will gap back above its SMA200.  The more important question is: if VIX holds its support, how much further could SPX drop?continued for members


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