The S&P 500 Switches From Bullish To Bearish, But For How Long?

Removing opinion and allowing the price of an asset to dictate a bias and a direction has proven itself over the decades to be a powerful approach to profiting from the financial markets. 

It is a concept that many budding investors today struggle to get their head around, instead choosing, both knowingly and unknowingly, to get involved in the clutter of noise plastered around the internet. 

Using The Daily 200 Simple Moving Average: A time-tested approach to establishing a bias to the price of an asset, one with its roots deep in history, is the use of the daily 200 simple moving average (d200sma).

Old school traders did not have the luxury of software as we do today and drew charts by hand. As one can imagine, this would have been a long and laborious process if monitoring hundreds of assets daily. So logic would prevail that only essential information would be plotted and updated on these hand-drawn charts. 

The d200sma proved itself to be an excellent indicator of the long-term trend. 

• If the price was above the d200sma, the price would have a bullish bias and traders would look for long setups. 
• If the price was below the d200sma, the price would have a bearish bias and traders would look for short setups. 

Significantly, they did not go against this bias, which helps traders stay out of unfavorable low-probability environments, minimising losses. Savvy investors and institutions still use this logic today. 

The S&P 500 Chart: I have the daily timeframe below of the S&P 500, my primary indicator for market conditions. 

Between May 2020 and January 2022, the price remained above the d200sma (black line), giving the price a bullish bias. The price was also trading above the daily 50 simple moving average (d50sma) (orange line) and the daily 20 simple moving average (d20sma) (blue line), confirming the price was in a bullish trend.

By applying patience and allowing the price to move above the d200sma, d50sma and the d20sma, you establish a high-probability environment in which to take a bullish position. You simply reverse the logic to establish a bearish bias and trend, as was the case in 2000, when the tech bubble burst and in 2008, during the financial meltdown. 

You then apply this same logic to the weekly timeframe, and you have a clear picture of market conditions that remove the guesswork and ill-informed opinions. 

Since January of this year, the price has crossed above and below the d200sma 10 times, clearly confirming a sideways market; the most recent cross from bullish to bearish occurred last week. 

Below is a close up of the consolidation the price is in. I have marked the 10 times the price has moved above and below the d200sma (black line).

My stance is quite simple; I still maintain an overall bullish bias, as the bull trend in play since 2009 is still intact. This is backed up by the number of stocks printing new all-time highs, as per my previous article, where I highlighted 10 stocks that had moved over 20% since January, when the indices were in freefall. 

As the saying goes, after every big move, the market consolidates. The S&P 500 moved 118% to the upside following the recovery from COVID-19. 

I continue to monitor for bullish stocks that are outperforming the indices and take positions at reduced risk on only the very best high-probability stocks. 

Once the price moves up the d200sma, the d50sma and d20sma, I will then switch to allocating full risk, as the weight of the market is in my favor. 

This is a simple, proven and profitable approach that blocks out profit-killing noise and instead aligns me with price movement.