Last week I showed that a bear market was most likely not upon us based on my KISS (Keep it Super Simple) Long term moving averages (LT-SMAs) charts. See here. Well, with another down week behind us, I surely most have been wrong, right!? Well, let’s make it even simpler than super simple, and look at the 50d and 200d SMAs. How they relate to each other and how price relates to them. We’ll compare the past year with the 2007, and 2011 market tops to get an idea.
First up: now (A) vs. 2007 (B). What we can observe in [A] is that the 50d and 200d SMAs over the past year have been most of the time at equal distance: green ascending lines. Hence both are rising on average at about the same pace. Price has dropped below the 50d SMA numerous times (12 to be exact) and thus this week’s drop below is nothing out of the ordinary and nothing to become bearish about. Instead 6 of these drops let to new ATHs. In [B] we can see that at the final stages of the bull market, the 50d SMA was swinging heavily and the 200d SMA didn’t show a steady-eddy incline either. Hence, the same green lines as in figure [A] don’t match as well in [B]. In fact, the 50d and 200d SMA were then getting closer and closer together, and reached the so called “death cross” late-December 2007. We don’t see that either in the current market. Thus, none of the 50d-200d SMA signals we see in 2007 are prevalent now.
Well, how about 2011 then? The last meaningful correction of the stock market? Also there we see that then [B] the 50d and 200d SMA are nothing compared to now [A]. In fact, there was a bearish death cross prior (in 2010), followed by a rapid increase in both SMAs and a subsequent golden cross (50>200). However, by June 2011, the SMAs were already converging again. Hence, also here no steady-eddy increase. In conclusion, it is fair to say that the weight of observable evidence tells us a bear market is not upon us. We make trading decisions based on what we see, not what we think it will be. The short term downward price action we’re currently experiencing (see here) should thus based on this analysis be treated as most likely another correction, until the longer term charts tell us differently.