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This Oddball Pattern Suggests the Stock Market Is Headed Higher

Last Updated September 23, 2020 12:54 PM
Lawrence Meyers
Last Updated September 23, 2020 12:54 PM

By CCN.com: The S&P 500 is showing an intriguing pattern of behavior. May 30 was the ninth consecutive day that the stock market index closed above the 200-day moving average but below the 50- day moving average.

In the 30 or so instances in which this has happened over the past 30 years, the S&P 500 showed a positive one-year return that ranged between 2.4 percent and 46 percent, with but one exception in 2007.

Stock Market Patterns Don’t Always Mean Anything

Ed Butowsky , Managing Partner at Chapwood Capital Investment Management, tells CCN.com:

“Stock market charts can show you just about any pattern if you look hard enough. While some of these patterns are simply coincidental, others exist for a reason. Most of the time, these patterns are not useful. That’s because, if you are a long-term investor with a diversified portfolio, patterns shouldn’t matter to you.”

If you are a trader, then patterns like these might be of some limited use.

What most people and investors miss about stock market patterns is that they can be reflective of stock market psychology. That overall psychology is actually more important in terms of near-term and medium-term trading than the pattern itself.

There is nothing inherently special about the 50-day moving average and the 200-day moving average.

As described, they are trendlines whose daily data points are determined by the average of the index’s closing day prices over the previous 50 or 200 days.

These trendlines tend to act as either price resistance or support.

Support and Resistance Are Keystones

When the S&P 500, or any individual stock, is trading above the 50-day moving average, that is generally bullish. As it passes underneath the 50-day average but stays above the 200-day average, it suggests a more neutral stock market direction.

If it breaks through the 200-day moving average, the stock market is generally considered to be headed in a bearish direction.

Technical analysis is a windsock, not a crystal ball. Consequently, we can’t rely too heavily on simple pricing patterns. What really drives stocks and indices is earnings growth.

That being said, this particular pattern tells us that the stock market may be seeking direction.

Yet looking at that data point in a vacuum doesn’t tell us much.

The One Question You Must Ask

In examining the dates in which this pattern has previously occurred, we also have to take into account what was going on with the overall economy.

All sorts of crosscurrents were occurring at all these other points in time, so what matters is what is happening now.

The market is seeking direction because there are bearish signs due to the inverted yield curve, the trade war with China, and questions about the overall health of the economy.

There are bullish signs in that earnings growth that some companies are doing very well. The American economy is generally in better shape than most of the economies around the world. The Fed may continue to lower rates.

So where will the market be a year from now? Nobody knows. But considering how overvalued the total market is, it wouldn’t surprise me if the overall market were lower.