S&P 500 drops below the 200-day moving average: What next?

The S&P closed at 1254.05 on Tuesday, five points above the March 16 Tsunami selloff intraday Low of 1249.05. After hours trading has priced in an additional 3-5 points to the downside. I could write on several different subjects as the majority of my short-term pattern recognition models are bullish. As a quant, you have to ask yourself are fundamental conditions in place similar to October of 2008, January 2002, or October 87, which would allow the S&P to defy historically significant oversold tape readings? I have been known to be wrong on many the occasion, but my instincts are those conditions are not in place at this time. We shall see.

A Capitulation Day in a Down Cycle

Decliners on the S&P have led Advancers for eight consecutive sessions and we are 18 days into the current selloff which began on July 8. Over those 18 days, we have recorded an ADT18 of 34.25, indicating that on average only 34.25% of issues, which were net changed on any day over the last 18 days, were positive.

We only had 19 advances today, which results in an ADT1 of 3.81.

S&P BREADTH DATA
Last 18 days

DATE ADV DEC
20110708 066 432
20110711 008 492
20110712 181 311
20110713 313 181
20110714 058 440
20110715 301 187
20110718 033 466
20110719 472 028
20110720 227 271
20110721 441 057
20110722 244 248
20110725 104 394
20110726 150 343
20110727 020 477
20110728 174 322
20110729 138 357
20110801 108 382
20110802 019 480

Below are the 25 cases, since 1970, which most closely match today's ADT18 and ADT1 levels. We had almost the identical readings at the end of last August, before the greatest September in the last half century. Note we also had almost identical numbers to today's on March 5, 2009 at the bottom of the last Bear Market. Not a prediction on my part, but simply an observation.

S&P Performance when ADT18 is below 40
And ADT1 is below 15

FORWARD S&P PERFORMANCE MAX
# DATE ADT1 ADT18 1MT 3MT 6MT 12MT DRDWN
1 19700525 8.7 33.5 5.4 15.5 21.1 41.6 -4.3
2 19720509 9.8 37.8 2.0 5.8 8.4 5.4 -1.3
3 19731120 9.1 33.5 -4.2 -5.3 -10.9 -31.2 -61.7
4 19740708 6.2 32.1 0.6 -20.0 -13.6 15.2 -34.3
5 19740912 11.0 34.7 6.6 1.1 25.3 24.9 -10.1
6 19741206 15.0 35.2 9.3 28.7 42.3 33.5 -1.7
7 19750805 17.5 35.4 -0.7 3.4 16.4 20.4 -6.2
8 19781027 11.2 34.2 1.5 7.7 7.6 6.3 -3.8
9 19791019 3.6 39.1 2.6 9.3 -1.0 29.4 -5.5
10 19800324 4.7 35.5 5.2 16.0 31.3 35.6 -4.2
11 19810908 12.2 32.8 3.7 5.8 -9.0 3.6 -17.2
12 19820604 14.7 36.1 -2.2 11.4 26.0 49.4 -9.2
13 19840208 12.8 36.5 -0.4 3.0 3.8 16.9 -7.4
14 19871019 0.4 35.3 6.8 10.9 14.7 23.2 -26.3
15 19881116 10.5 35.6 4.7 11.7 19.5 29.1 -1.7
16 19900823 3.5 32.2 1.4 2.6 19.1 28.4 -7.1
17 19970411 3.3 38.5 11.8 24.3 31.1 50.6 -2.8
18 19980804 6.3 39.0 -9.2 4.3 16.5 21.8 -16.2
19 20020719 7.6 34.7 12.1 4.3 6.4 17.2 -13.5
20 20021009 13.8 36.3 15.2 19.4 11.5 33.7 -2.8
21 20030212 12.9 36.5 -1.8 15.4 19.9 40.7 -3.6
22 20081022 4.2 34.1 -10.8 -7.7 -5.9 21.9 -41.2
23 20090305 4.4 34.0 23.4 37.7 48.9 66.8 -5.4
24 20100520 0.6 35.8 4.3 0.0 12.0 24.4 -9.0
25 20100830 3.8 39.4 8.8 12.5 26.5 19.6 -1.5
26 20110802 3.8 34.2 ? ? ? ? ?

#UP-DN = 18-7 22-3 20-5 24-1
AVG%CHG= 3.84 8.72 14.70 25.14 -11.9
MED%CHG= 3.67 7.69 16.42 24.42 -6.16

S&P Tape Data courtesy Ned Davis Research Inc


The forward annual performance in this setup is an eyepopping 24-1 with a median return of 24.42% but Reverse Thrust signals are different animals than forward thrust signals. Note, that there are 8 double digit Drawdowns and the one month performance is only 18-7. That is, because we are usually almost always promised a retest at some point in the following month after whatever level ends up being the Low. The couple of cases I have observed in my studies which did not get a retest after this kind of selloff either 1) were themselves a retest of a previous Low or 2) were followed by a forward thrust in the next couple of weeks. For example, last August selloff was followed by a forward thrust in Sept and there is an outside chance today's selloff may act like a retest of the Tsunami Low on March 16. I will comment further on this after we have a clearly defined bottom.

Breaking the 200DMA

The S&P closed below the 200DMA today for the first time in 224 trading days. In case you were wondering, below are all the occasions since 1950, when the S&P closed below the 200DMA for the first time in over 200 Days. I listed them in descending order of days above the 200DMA. The forward returns are fractionally above the historic norms for similar time periods. Interesting the 96-98 rally was the second longest in terms of 200DMA in the last 60 years. In 1955-56, you had an 8% earnings yield relative to a 2% average interest rate. You don't get those opportunities often, or do you?

S&P PERFORMANCE AFTER BREAKING THE 200DMA
FOR FIRST TIME IN 200 TRADING DAYS

FORWARD S&P PERFORMANCE
DATE S&P 200DMA #DAYS 1MT 3MT 6MT 12MT MAXDDN
1 19560523 45.02 45.05 628 3.49 6.62 0.27 4.73 -6.20
2 19980827 1042.59 1058.70 525 0.21 14.36 18.77 29.32 -8.88
3 19960715 629.80 631.88 394 5.16 11.55 21.82 46.99 -0.50
4 19650609 85.04 85.94 386 0.79 4.49 7.67 0.54 -4.22
5 19520430 23.32 23.39 381 2.32 8.79 3.56 5.57 -0.65
6 19940325 460.58 461.57 363 -1.71 -3.86 -0.20 8.77 -4.93
7 19590915 56.68 56.94 355 0.34 3.92 -3.42 -2.58 -6.00
8 19831214 163.33 163.40 333 2.26 -4.02 -7.92 -0.39 -10.49
9 19620404 68.49 68.77 332 -3.29 -17.52 -17.21 -0.93 -30.91
10 20040716 1101.39 1103.65 313 -2.00 0.62 7.55 11.49 -3.59
11 19900122 330.38 335.49 293 -1.42 1.43 9.45 -0.63 -11.82
12 19850917 181.36 181.64 283 3.47 16.15 29.39 27.75 -0.39
13 19631122 69.61 69.97 252 6.71 11.51 15.97 23.95 0.00
14 19810505 130.32 130.49 243 1.46 1.80 -5.20 -9.71 -21.41
15 20070803 1433.06 1450.65 243 2.86 5.34 -2.63 -12.05 -17.96
16 19860912 230.67 230.93 232 2.09 7.23 26.25 39.58 -0.33
17 19871015 298.08 298.60 227 -17.59 -15.44 -12.85 -7.58 -33.12
18 19990923 1280.77 1302.35 226 1.63 13.86 19.25 13.11 -2.67
19 20110802 1254.05 1285.82 224 ? ? ? ? ?
20 20100520 1071.59 1102.49 216 4.29 0.01 11.96 24.42 -4.79
21 19710730 95.58 95.72 213 4.12 -1.41 8.98 12.35 -6.01
22 19721016 106.77 107.75 211 7.83 10.65 4.37 3.20 -6.21
23 19911119 379.42 380.87 208 0.82 7.60 9.74 11.65 -1.12
24 19671103 91.78 92.15 207 2.96 0.53 7.50 12.29 -4.63
25 19761011 101.64 101.71 202 -1.97 2.44 -2.72 -6.60 -7.07

#UP-DN = 18- 6 19- 5 16- 8 16- 8
AVG%CHG= 1.03 3.61 6.26 9.80 -8.08
MED%CHG= 1.86 4.20 7.52 7.17 -5.47

HIST AVG= 0.67 1.98 4.13 8.52

Wayne Whaley is a Systems Engineering graduate from Georgia Tech who takes an engineering approach to tape analysis. He is a registered CTA, co-owner of Witter & Lester and the 2010 MTA Charles Dow Award winner for research surveying various tape measures. For more insight see www.witterlester.com.

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