The S&P 500 (SPX) closed in red at 2,722 level (-0.15%) on Tuesday (November 13, 2018), but the two other US major indexes suffer during Tuesday’s trading session. Only Nasdaq Composite closed almost flat.
It is time to look at the charts.
The crossover between 50-Day MA and 200-Day MA.
Two moving averages (50-Day MA and 200-Day MA) can be used together to generate crossover signals. These signals work great when a good trend takes hold. However, a moving average crossover system will produce lots of whipsaws in the absence of a strong trend.
A bearish crossover occurs when the shorter moving average (50-Day) crosses below the longer moving average (200-Day). This is known as a dead cross.
Specifically, the first chart shows:
- Dow Jones 30 ( DJIA) with a 50-day SMA (blue line) and 200-day SMA (red line). The 50-day SMA is far above the 200-day SMA. I note the price itself is close to the 200-day SMA. The 200-day SMA could act as support here.
The second chart shows:
- S&P 500 (SPX) with a 50-day SMA (blue line) and 200-day SMA (red line). The 50-day SMA is above the 200-day SMA. The price itself is also close to the 200-day SMA.
The third chart shows:
- Russell 2000 (RUT) with a 50-day SMA (blue line) and 200-day SMA (red line). We note the 50-day SMA is too close to the 200-day SMA in mid-November.
The small-cap Russell 2000 index dangerously close to death crossover. On Tuesday, Russell 2000 is less half of a point from seeing its 50-day moving average fall beneath the 200-day.
Many chart watchers believe that death crossover marks the point in which a short-term decline changes into a longer-term downtrend (see chart).
For the year, the Russell 2000 is down 1.4%, while the Dow is set for a year-to-date advance of 2.3%, the S&P 500 is on pace for a yearly gain of 1.8% and the Nasdaq is poised for a year-to-date return of 4.3%.
The death crossover on the Russell 2000 reflects a broad participation of US small-cap stocks in the stock market decline. This is bad news for the broader stock market.
However, there are a couple of things to think about with regard to moving averages.
As with most technical analysis tools, moving averages should not be used on their own, but in conjunction with other complementary tools. MA crossovers are prone to whipsaw. A price or time filter can be applied to help prevent whipsaws. Traders might require the crossover to last 3 days before acting or require the 50-day MA to move below the 200-day MA by a certain amount before acting.The above references the authors opinion and is for information purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.
Dan has been analysing professionally financial markets for more than a decade. His career was spent serving both in the banking industry and asset management. Dan’s expertise includes global macroeconomics, corporate banking and portfolio management. He has Master degrees from both French Pantheon Assas Paris II University and British London Metropolitan University.
TA qualifications: CFT, MSTA