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Aug. 3, 2011, 12:01 a.m. EDT
By Mark Hulbert, MarketWatch
CHAPEL HILL, N.C. (MarketWatch) "” It was unrealistic to expect the 200-day moving average to forever support the stock market, of course.
But when it finally failed on Tuesday, it did so in a big way.
You may recall that the 200-day moving average had provided support on several occasions in mid June, and as recently as Monday of this week. On each of those prior occasions, the market dropped to the vicinity of that level and then turned back up "” tempting some diehard bulls into thinking that it would continue to provide support, no matter what silliness Washington would serve on the American people or what terrible economic news got reported.
/quotes/zigman/3870025 SPX 1,254.05, -32.89, -2.56%
Those illusions were shattered on Tuesday, when the market didn't pause long enough at the 200-day moving average to even wave goodbye. The S&P 500 /quotes/zigman/3870025 SPX -2.56% ended up closing 2.4% below that level.
How bad is it that the market so decisively violated this key technical level?
Many technicians consider breaking below the 200-day moving average to be the official end of a bull market. So, at least according to this definition, we're now in a bear market.
Furthermore, even though the market is overdue for a snap-back rally "” given that it has now declined for eight straight sessions "” the distinct possibility exists that the market will continue falling for several more days anyway. That's because many mechanical trend-following strategies focus on where the market closes relative to the 200-day moving average, which means that a lot more selling may yet hit the market.
Is there any way for a bull to wriggle out from underneath the full force of this bearish news? One way to at least ameliorate it, which I suggested two months ago when writing about this subject, is to argue that the 200-day moving average has lost much of the ability it once had to be a helpful market timing indicator. ( Read my June 10 column on the 200-day moving average's historical record. )
The reason for its diminished ability, some researchers theorize, is that the 200-day moving average has become so popular that followers have killed the veritable goose that lays the golden egg. And we very well may have witnessed this on Tuesday.
When, an hour or so before the end of trading, it became obvious that the market would close below that level, selling accelerated "” with the Dow Jones Industrial Average /quotes/zigman/627449/delayed DJIA -2.19% quickly dropping more than 100 points. It's quite possible that much of this selling came from investors getting a jump start on the sell signal that would become official at the close.
Does this mean that traders shouldn't care about the breach of the 200-day moving average? That may be going too far, according to Blake LeBaron, a finance professor at Brandeis University, one of whose research interests is technical analysis "” and who was one of the first researchers to document the moving average's diminished market timing abilities.
In an interview Tuesday afternoon, LeBaron reasoned that the moving average could very well still be valuable as part of a more complex market timing strategy that incorporates many different technical indicators. In other words, even though none of those indicators individually deserves to be the basis for an all-or-nothing decision for our portfolios, they collectively can still be helpful.
The bottom line? We definitely should care about the market breaking below the 200-day moving average; we just shouldn't base a sell signal for our entire portfolio on only this one technical event.
/quotes/zigman/3870025 Add SPX to portfolio SPX S&P 500 Index 1,254.05 -32.89 -2.56% Volume: 0.00 Aug. 2, 2011 5:10p var embeddedchart124732823Chart = new EmbeddedChart('#embeddedchart124732823', NormalChartStyleNoDecimals, 240, 80, '1dy', '5mi', null, null, null, 'US:SPX'); jQuery.data($('#embeddedchart124732823').get(0), 'embeddedchart', embeddedchart124732823Chart); /quotes/zigman/627449/delayed Add DJIA to portfolio DJIA Dow Jones Industrial Average 11,866.62 -265.87 -2.19% Volume: 207.06M Aug. 2, 2011 4:30p var embeddedchart70394702Chart = new EmbeddedChart('#embeddedchart70394702', NormalChartStyleNoDecimals, 240, 80, '1dy', '5mi', null, null, null, 'US:DJIA'); jQuery.data($('#embeddedchart70394702').get(0), 'embeddedchart', embeddedchart70394702Chart); //$(document).ready(function() { var storywidth = $('#mainstory').width(); var maxwidth = storywidth; $('#maincontent pre').each(function (index, value) { var thiswidth = $(value).width(); if (thiswidth > maxwidth) maxwidth = thiswidth; }); var offset = maxwidth - storywidth; if (offset > 0) { var margin = 13; var blanketwidth = $('#blanket').width(); var contentwidth = $('#maincontent').width(); $('#blanket').width(blanketwidth + offset + margin); $('#maincontent').width(contentwidth + offset + margin); $('#mainstory').width(storywidth + offset + margin); } //});Mark Hulbert is the founder of Hulbert Financial Digest in Annandale, Va. He has been tracking the advice of more than 160 financial newsletters since 1980.
var OB_permalink= 'http://www.marketwatch.com/story/markets-major-trend-now-down-2011-08-03'; var OB_Template="marketwatch"; var OB_widgetId= 'AR_1'; var OB_langJS ='http://widgets.outbrain.com/lang_en.js'; if ( typeof(OB_Script)!='undefined' ) OutbrainStart(); else { var OB_Script = true; var str = ""; document.write(str); } Comments on this story 6 Comments Most Popular AAA verdict awaited on U.S. debt-limit deal 1. Slide Show The world's 10 most expensive cities 2. Market Snapshot U.S. stocks extend losing streak on debt jitters 3. Washington reaches sweeping budget deal 4. U.S. stocks turn negative on economic data 5. Join the Conversation 6 Comments 1,000 characters My comments... Community guidelines » Add Comment Breaking Insight Robert Powell's Your Portfolio Five investments for a falling dollar Mark Hulbert Market's major trend now down Matthew Lynn's London Eye Time to dump Goldman, and other investment banks Jon Friedman's Media Web I'm a loser, on Klout Find a Broker Partner Center » Video Juniper Networks Shares Knocked Back Netflix Swings Wildly, But Keeps Barrelling Ahead Travelzoo, On Cloud Nine, Suddenly Loses Altitude WebMD Catches Flu from Bears About Mark Hulbert RSS News feedMark Hulbert is editor of the Hulbert Financial Digest, which since 1980 has been tracking the performance of hundreds of investment advisors. The HFD... Expand
Mark Hulbert is editor of the Hulbert Financial Digest, which since 1980 has been tracking the performance of hundreds of investment advisors. The HFD became a service of MarketWatch in April 2002. In addition to being a Senior Columnist for MarketWatch, Hulbert writes a monthly column for Barron's.com and a column on investment strategies for the Journal of the American Association of Individual Investors. A frequent guest on television and radio shows, you may have seen Hulbert on CNBC, Wall Street Week, or ABC's World News This Morning. Most recently, Dow Jones and MarketWatch launched a new weekly newsletter based on Hulbert's research, entitled Hulbert on Markets: What's Working Now. Collapse
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