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Nothing good happens below the 200 daily moving average

By David Belle

11:04, 23 August 2022

David Belle
David Belle of Macrodesiac explains his technical analysis findings - Picture: Macrodesiac

I was having a chat on Twitter with a mate of mine last week about the S&P 500 (US500).

Earlier this year, we used our magic technical analysis powers and noticed a line that had acted as support and turned resistance in the latter part of 2021.

We are not technical analysis aficionados, but we do like to look at TA more as an identifier of exhaustion and when the tide may be turning, in context of the macro backdrop, which is important as we will discuss.

This is how that line turned out…

The S&P 500 index (200DMA in blue)

But more importantly, the National Homebuilders Association of America stated (when price was right at the 200 daily moving average) that there was a housing recession in the USA.

Below is a timestamp of a tweet I had sent mentioning this, before the market fell to where we are trading currently.

Importance of housing market as a key indicator

Now this macro context is hugely important, because housing is the leading indicator of an economy’s health. If people aren’t buying houses, less credit flows, the wealth effect is dampened and eventually, people lose confidence in the economy going forward - including riskier assets such as stocks.

See the great image below that explains how market turns start with housing.

(Chart from Michael Kantro @ Piper Sandler).

But there’s something else to note which is more pertinent to the current situation regarding inflation.

We saw some horror prints over the last week.

UK CPI printed at 10.1% year over year, and then Germany recorded the highest producer price index YoY increase at 37.2%, destroying the expected rate of around 32%.

Again, we need to give this context. Why is this a catalyst for more US equities downside?

US30

39,705.00 Price
+0.260% 1D Chg, %
Long position overnight fee -0.0262%
Short position overnight fee 0.0040%
Overnight fee time 21:00 (UTC)
Spread 2.2

HK50

18,917.30 Price
-0.960% 1D Chg, %
Long position overnight fee -0.0225%
Short position overnight fee 0.0005%
Overnight fee time 21:00 (UTC)
Spread 5.0

DE40

18,738.40 Price
+0.340% 1D Chg, %
Long position overnight fee -0.0221%
Short position overnight fee -0.0001%
Overnight fee time 21:00 (UTC)
Spread 1.5

US100

18,873.40 Price
+0.730% 1D Chg, %
Long position overnight fee -0.0262%
Short position overnight fee 0.0040%
Overnight fee time 21:00 (UTC)
Spread 1.8

Well, consider the recent softer than expected inflation print in the US of 8.5%, which led to the big short covering rally. It’s likely that the two prints from over this side of the pond gave people a bit of a pause that the US inflation rate would start pushing lower.

And there is no surprise to me that this is occurring once again at the 200 daily moving average.

Or is it simply confirmation bias? In my view, it doesn’t really matter. When trading we are taking our best guess and putting it into action on the asset class that is likely to express said view the best.

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What could we perhaps expect now then?

Well, the 200-week is ‘probably’ somewhere to look out for bullish data.

Of course, there is a lot that can happen between there, but we want to be as objective and process driven as possible, whilst doing a job that is massively subjective and works based on sheer chaos!

Bear this in mind - when looking at moving averages, look for reasons the market may want to rally or fall away from them, especially the long term ones…

But in the end, remember the saying… as long as price is below the 200 daily moving average, expect nothing good to happen.

Why the 200-day moving average could mark a turning point

What is key to note in trading are turning points, and turning points in context. The 200 daily moving average (200 DMA) does this fantastically.

But why?

There’s nothing so important about the 200 daily moving average. It’s just the last 200 closing prices divided by 200…

But when everyone thinks it’s important is when it does indeed become important, and in an algo driven world, there has to be some sort of execution criteria derived from specific indicators and numbers that might be important in a broader (longer than one week, not high frequency intra-day trading) context.

And when there is additional macro backing for the 200 daily moving average to be important is when it becomes an actual trading signal.

Take last week, for example.

We noted on Twitter that the 200 daily moving average wasn’t far away from current market price, with a little trendline above too.

Markets in this article

US500
US 500
5336.6 USD
26.3 +0.500%

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