Caution from 200 week breakout failure at SPX 1191

Simply watching the 200-week simple moving average can save you a lot of pain (above the dashed red line long, below it short or neutral).  Last week we zoomed above it for the first time since June 2008 with Dr. Benny B’s blessings and plenty of exuberance.  Unfortunately, we moved right back under it yesterday.  Watch for a weekly close below 1191 for the possibility of a failed breakout.  You can see how we failed to get above the 200-week average the week of April 30th and you know what happened the next week……….Could the dashed red line be significant?

On a shorter timeframe you can see the 20-week (green line) – 50-week (pink line) cross provided some great signals over the last 10 years getting you out somewhere in 2001 (estimated as my chart doesn’t go back that far), in around June 2003, out and back in again in late 2004, out in January 2008, and in around August 2009.  This year the signal hasn’t worked out too well.  You can see that you would have gotten out the week of September 3rd just as a major rally was under way and gotten in this week just in time for a nice little drop.  Is it time to do the opposite of the signal?  Are too many market participants watching the same signals so they no longer work?  Quite possible.  I threw on some SMALL “test” shorts this morning on SPX, Gold and Oil.  They are all below their respective 20-day moving averages that many pro’s use for a quick sell rule (like SPX did yesterday).

Stop out is above an SPX 1191 daily close and wait and see how the week closes.  Initial target is 50-day at 1167 to book 1/2 profits and use break even stop on other half.  Many of these same events happened in April, i.e. riots over austerity in Europe broadcast to your living room, a rally in the dollar and numerous breakdowns through the 20-day moving average of leading stocks and ETF’s. I remember going short the morning of May 6th and then the “flash” crash was brought to you courtesy of the Computers.  I wasn’t able to book a ton of profit, as I was stunned at the quickness of the drop.  I thought they were going to close the exchange similar to 9-11 and I was planning to stay short through the closure.  The SPX bounced right back up within minutes and I booked ½ profit in the last hour.  They made it very tough as the next Sunday night they announced a huge bailout package Euro style (with the S & P futures limit up that night).  I gave back all the rest of the gains on the last ½ as they took the S & P up for a few days but couldn’t get above the 50-day and the drop resumed.  We are still above the 50-day which makes any shorts a very risky business at this point.  It is also interesting that the 50-day is right around where it was on May 5th currently at 1167 versus 1170 on May 5th.  If 1167 breaks expect to see the 200-day at 1130 in “short” order (no pun).  Remember we could also zoom higher from a bounce off the 50-day into the end of the year but with everyone thinking their capital gains taxes are going up (and they probably are), there could be some extra selling pressure by December 31st.  Have fun!

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