S&P 500 Nears 200-DMA

The S&P 500 is close to its 200-day moving average. This is simply the average of the last 200 trading days.

I’ve mentioned that I’m not a terribly big fan of technical analysis. One exception is the 200DMA because it has a pretty decent track record. Here’s what I wrote last year.

So does the 200DMA work? The evidence suggests that it’s a pretty good indicator of future price performance. When the S&P 500 has been below the 200DMA, it’s dropped a total of about 20% over the equivalent of 27 years. In other words, the S&P 500 has been below its 200DMA about one-third of the time.
Historically, the best time to invest has been when the S&P is less than 1.7% below the 200DMA.
When the index is above the 200DMA, well, then everything looks much brighter. All of the market’s gain and then some have happen when we’re above the 200DMA which occurs about two-thirds of the time.
The market seems to like nearly every point of being above the 200DMA. Danger only clicks in when the S&P 500 is over 17.5% above the 200DMA which is a very high reading.

I think the 200DMA moving average is a good example of a dumb rule that works for smart reasons. The key is that it understands that the market is a trend-friendly data series. Once things start moving in one direction, they tend to keep moving.

Posted by Eddy Elfenbein on May 19th, 2010 at 11:50 am

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